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June

IRS Official Says New Arrests Coming in Soccer Corruption Probe

BY DAVID VOREACOS

 The U.S. investigation of corruption in soccer’s governing body is moving to a new phase that will bring criminal charges against more people, the Internal Revenue Service’s chief investigator said in an interview.

How the case develops hinges in part on the fate of nine FIFA officials and five sports marketing executives charged in a racketeering and bribery indictment unsealed May 27, said Richard Weber, chief of the IRS Criminal Investigation Division. The prosecution, which has garnered worldwide attention, came two days before FIFA re-elected its embattled president, Sepp Blatter, 79, for another four-year term.

“It’s probably hard to say who is on the list for the next phase and the timing of that,” Weber said in a phone interview Friday. “I’m confident in saying that an active case is ongoing, and we anticipate additional arrests, indictments and/or pleas.”

The IRS joined the Federal Bureau of Investigation and U.S. prosecutors in Brooklyn, New York, in building a case alleging sports-marketing executives paid more than $150 million in bribes and kickbacks over 24 years for media and marketing rights to soccer tournaments.

Blatter was asked at a press conference in Zurich Saturday if he was concerned that he would be arrested.

“Arrested for what? Next question,” he said.

Prosecutors charged Jeffrey Webb and Jack Warner, the current and former presidents of soccer’s governing body for North America, Central America and the Caribbean, or Concacaf. They secured guilty pleas from Charles Blazer, 70, the group’s former general secretary; Jose Hawilla, a Brazilian sports marketing executive, who agreed to forfeit $151 million; and Warner’s two sons, Daryll and Daryan.

World Cups
 

Blazer admitted he participated in several bribery schemes involving soccer tournaments, including the World Cups in 1998 and 2010, according to court records. He took a $750,000 cut of a $10 million bribe to support South Africa’s host bid for the 2010 World Cup, according to the criminal charges he admitted.

The $10 million paid to Concacaf four years after after South Africa’s winning bid to host 2010 FIFA World Cup wasn’t a bribe, Johannesburg-based Sunday Independent reported, citing the president of the country’s soccer body, Danny Jordaan.

The money was South Africa’s contribution toward Concacaf’s soccer development fund, Jordaan said.
Blatter denied he was involved in the payment, which the indictment says was arranged by high-ranking officials at FIFA, the South African government and the bid committee.

“I have no $10 million,” Blatter said Saturday.

The IRS entered the case in 2011 when a Los Angeles-based agent, Steven Berryman, began a tax investigation of Blazer, Weber said. Blazer lived in a Trump Tower apartment, flew on private jets, dined at the world’s finest restaurants and hobnobbed with celebrities and world leaders.

His blog, “Travels with Chuck Blazer and his Friends,” featured pictures of Blazer with Hillary Clinton, Nelson Mandela and Prince William, among others. Blazer, now fighting cancer, drew the IRS into FIFA, Weber said. In late 2011, the IRS joined the FBI, which was separately probing FIFA.

Tax Case


The FBI probe arose from an inquiry into aspects of Russian organized crime by the Eurasian Joint Organized[mxr1]  Crime Task Force in the agency’s New York office, the New York Times reported this week, citing people it didn’t identify.

IRS agents built an $11 million tax case against Blazer, Weber said.

“This started with a U.S. citizen beating a significant amount of taxes and using offshore tax havens in his criminal schemes,” Weber said. “Through the investigation of Blazer, relatively early on our agents were confident that there was widespread corruption within FIFA.”

Blazer secretly pleaded guilty in 2013 to racketeering conspiracy, wire-fraud conspiracy, money-laundering conspiracy, income-tax evasion and failure to file a Report of Foreign Bank and Financial Accounts, charges that were made public Wednesday. He forfeited more than $1.9 million at the time of his plea and has agreed to pay more money when he’s sentenced.

Confronted years ago by the IRS for failing to pay taxes, Blazer agreed to wear a hidden microphone in meetings with FIFA officials, the New York Daily News reported in November.

Weber wouldn’t name any individuals who are cooperating. “I’m comfortable saying in a case like this one, we do rely on individuals that have information about the inner workings of an organization,” he added.

Weber said that investigators traced financial records from 33 nations and obtained most of them through treaty requests.

HSBC, Barclays, Standard Chartered are studying transactions to ensure proper procedures took place, the London-based Sunday Times reported, citing unidentified people at lenders. Standard Chartered said it’s looking into two payments mentioned in the indictment, while HSBC and Barclays declined to comment to Bloomberg.

“When you’re talking about a $150 million-plus racketeering and money-laundering case, where you have to trace the bribe and kickback case through multiple accounts and intermediaries and offshore corporations and official ownership, it’s a maze of documents and a significant jigsaw puzzle that has to be put together,” Weber said.

“When you’re dealing with so many countries and so many different players, it is reasonable to spend a few years on a case like this,” he said.

The case is U.S. v. Webb, 15-cr-00252, U.S. District Court, Eastern District of New York (Brooklyn).

—With assistance from Renee Bonorchis in Johannesburg

 

 

 

Minimizing self-employment taxes to owners of pass-through entities

BY GEORGE G. JONES AND MARK A. LUSCOMBE

 

Historically, distributive shares of partnership income to a general partner are treated as net earnings from self-employment and are subject to Self-Employment Contributions Act taxes. At the same time, earnings from an S corporation that are allocated to its shareholders are not treated as net earnings from self-employment and are not subject to SECA tax. A number of factors can affect the decision whether to conduct a business as a partnership, S corp, or another type of entity; this difference in employment tax treatment can be important.

Recognizing this disparity, the Treasury, in the administration’s 2016 budget, has proposed that income from a professional service business be subject to SECA taxes in the same manner, regardless of the form of the business. Such a change may eventually provide a certain degree of equity among entities, as well as removing the challenge of figuring out where to slot limited liability companies into the SECA framework. Nevertheless, it should not be lost on taxpayers that the Treasury proposal resides within a section called “Loophole Closers” and is scored to raise almost $75 billion over 10 years. Furthermore, without some accommodation to separate reasonable compensation from what may be considered a return on investment, a degree of uncertainty is likely to remain.

 CURRENT TREATMENT

Code Sec. 1401(a) and (b) impose a tax on self-employment income of 12.4 percent, plus a hospital insurance tax of 2.9 percent, for a combined rate of 15.3 percent. Under Sec. 1402, the tax applies to net earnings from self-employment, defined as the gross income derived by an individual from any trade or business carried on by the individual.

Reg. Sec. 1.1402(a)-1(a)(2) and 1.1402(a)-2(d) impose the tax on a member’s distributive share of partnership income from a trade or business. However, Code Sec. 1402(a)(13) excludes from SECA tax the distributive share of partnership income allocated to a limited partner. Interestingly, Reg. Sec. 1.402(a)-2(g) treats partnership income as net earnings from self-employment “irrespective of the nature of [the partner’s] interest” and even if the member is a “limited or inactive partner,” but this provision as interpreted over the last several years apparently does not affect the basic exclusion for limited partners.

While the code and regs do not discuss S corp earnings, the IRS early on in Rev. Rul. 59-221 concluded that an S corp shareholder’s distributed and undistributed dividends are not derived from a trade or business carried on by the shareholder. Accordingly, amounts included in income are not net earnings from self-employment for SECA taxes. The IRS and the courts have affirmed this treatment. See, for example, Ding v. Commissioner (9th Cir., December 30, 1999, 2000-1 USTC ¶50,137, affg TC Memo. 1997-435), where the taxpayer sought to deduct S corp losses from the self-employment earnings. The court specifically “recognized the continuing validity” of the 1959 revenue ruling. Of course, a shareholder can also be an employee, which is often the case, and compensation for those efforts must be “reasonable.”

 LITIGATION

The IRS and taxpayers have litigated the treatment of a partner’s earnings by arguing whether the partner derived the income as a limited partner or in some other manner. In the case of LLCs, the IRS has argued that owners of interests in an LLC do not hold an interest as a limited partner and therefore are subject to SECA taxes as general partners. Taxpayers, on the other hand, have argued that LLCs are different entities from limited partnerships and that interest holders should not be classified according to traditional analysis as either general or limited partners.

A recent court case demonstrates the continuing relevance of the self-employment tax issue. In Methwin v. Commissioner, T.C. Memo. 2015-81, CCH Dec. 60,295(M), the Tax Court concluded that an investor in several oil and gas ventures was subject to SECA tax on his earnings from the ventures because they were partnerships and he was a member. The investor had a small interest in the ventures (2-3 percent) and was not personally involved in any business activity. Furthermore, because the ventures had made a Code Sec. 761 election to be excluded from Subchapter K of the Tax Code (the partnership provisions), the investor argued that the venture was not a partnership.

The court stated that, based on Cokes v. Commissioner, 91 T.C. 222 (1988), CCH Dec. 44,792, a taxpayer who is not active in the management of a trade or business may still be liable for SECA tax if the business is carried out through a partnership of which he is a member. The court determined that the venture continued to be a partnership, despite its election out of Subchapter K. Again citing Cokes, the court said that “a partnership remains a partnership … and other sections of the code [such as Sec. 1401] are applicable as if no exclusion [from Subchapter K] existed.”

PROPOSALS

 

1. IRS activity. The IRS issued proposed regs in 1997 (REG-209824-96, Jan. 13, 1997) that would treat an individual as a limited partner (not subject to SECA tax) unless the individual:

·         Has personal liability as a partner for claims against the partnership;

·         Has the authority to contract on behalf of the partnership under state law; or,

·         Participates in the partnership’s trade or business for more than 500 hours during the partnership’s tax year.

The proposed regulations provide exceptions for certain individuals owning both general and limited interests in the partnership and certain individuals working more than 500 hours during the year.

These regulations have not been adopted or withdrawn. Commentators have suggested that the IRS unofficially follows the regulations even though they are in proposed form. In any case, in its latest business plan on potential guidance (2014-2015 Priority Guidance Plan, Third Quarter Update, released April 28, 2015), the IRS proposed to provide “Guidance on the application of Sec. 1402(a)(13) to limited liability companies.”

2. Treasury budget proposal. In discussing its FY 2016 “greenbook” proposal (“Conform Self-Employment Contributions Act (SECA) Taxes For Professional Service Businesses”), the Treasury stated that “the taxation of income earned by owners of pass-through entities is outdated, unfair and inefficient” because it treats business owners differently based on the legal form of the entity and the payment they receive. Many owners avoid payroll taxes on income that is equivalent to self-employment earnings and would otherwise be subject to employment taxes, the Treasury indicated.

The Treasury also noted that S corp owners game the system by paying themselves low salaries, which are subject to employment taxes, and inflating their dividends. Dealing with this problem, according to the Treasury, is “a challenge for the IRS to administer. The determination of ‘reasonable compensation’ of S corporation owners generally depends on facts and circumstances and … is difficult for the IRS to enforce.”

The Treasury proposal would apply to professional service businesses organized as S corps, limited partnerships, general partnerships, and LLCs taxed as partnerships. In an effort to make this change not entirely one-sided in favor of the government, a proposal earlier in 2014 by then-Ways & Means Committee Chair Dave Camp would allow partners and S shareholders to take a 30 percent deduction to account for capital and up to 100 percent for those who did not materially participate in the entities activity.

 CONCLUSION

Most taxpayers are sensitive to their liability for employment taxes and prefer to avoid the application of SECA taxes of 15.3 percent on earnings from a trade or business. With the growth of limited liability companies and limited liability partnerships, traditional SECA tax rules have become even more difficult to apply. The issue awaits further action from the IRS, the Treasury, and/or Congress.

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at Wolters Kluwer, CCH Tax and Accounting.

 

 

 

Tax rules for gamblers

If you've done some gambling, you may need to know about the applicable federal income tax rules. They can be summarized as follows.

You must report 100% of your wagering winnings as taxable income on your Form 1040. The value of complimentary goodies ("comps") provided by gambling establishments must also be included in taxable income because comps are considered gambling winnings. These amounts are subject to your regular federal income tax rate, which can be as high as 39.6%.

If you itemize deductions, you can write off wagering losses on Schedule A of Form 1040. However, allowable wagering losses are limited to your winnings for the year, and any excess losses cannot be carried over to future years. Also, out-of-pocket expenses for transportation, meals, lodging, and so forth do not count as gambling losses and, therefore, cannot be written off at all.

If you qualify as a professional gambler, your wagering winnings and losses are reported on Schedule C of Form 1040. However, deductions for wagering losses are limited to your winnings, and any excess wagering losses cannot be carried over to future years (same as for amateurs). The good news here is that you can also deduct travel expenses and other out-of-pocket costs of being a professional gambler.

In any case, you must adequately document wagering losses (and out-of-pocket nonwagering expenses if you are a professional) to claim a deduction. The government says you must compile the following information in a log or similar record:

1.   The date and type of specific wager or wagering activity.

2.   The name and address or location of the gambling establishment.

3.   The names of other persons (if any) present with you at the gambling establishment. (Obviously, this is not possible when the gambling occurs at a public venue such as a casino, race track, or bingo parlor.)

4.   The amount won or lost.

For example, the IRS says you can document income and losses from wagering on table games by recording the number of the table that you played and by keeping statements showing casino credit that was issued to you. For lotteries, your wins and losses can be documented by winning statements and unredeemed tickets.

Last but not least, be aware that amounts you win may have to be reported to you on IRS Form W-2G ("Certain Gambling Winnings"). In some cases, federal income tax may have to be withheld, too. Anytime a Form W-2G is issued to you, the IRS gets a copy. So the government will expect to see the winnings show up on your tax return.

Please call us if you have questions or want more information on the tax rules for gambling activities.

 

 

 

Tax tips for farmers

Farms include ranches, ranges and orchards. Some raise livestock, poultry, or fish and others grow fruits or vegetables. Individuals report their farm income on Schedule F ("Profit or Loss From Farming"). If you own a farm, here are nine tax tips you should know about:

1.   Crop insurance. Insurance payments from crop damage count as income. Generally, you should report these payments in the year you get them.

2.   Sale of items purchased for resale. If you sold livestock or items that you bought for resale, you must report the sale. Your profit or loss is the difference between your selling price and your basis in the item. Basis is usually the cost of the item. Your cost may also include other amounts you paid, such as sales tax and freight.

3.   Weather-related sales. Bad weather such as a drought or flood may force you to sell more livestock than you normally would in a year. If so, you may be able to delay reporting a gain from the sale of the extra animals.

4.   Farm expenses. Farmers can deduct ordinary and necessary expenses they paid for their business. An ordinary expense is a common and accepted cost for that type of business. A necessary expense means a cost that is proper for that business.

5.   Employee wages and benefits. You can deduct reasonable wages and other compensation you paid to your farm's full- and part-time workers, including reasonable wages or other compensation you pay to your spouse if a true employer-employee relationship exists between you and your spouse. You must withhold Social Security, Medicare, and income taxes from their wages. You can also deduct the cost of benefits you provide to your full- and part-time workers (including your spouse if a true employer-employee relationship exists), such as medical insurance or contributions to a retirement plan.

6.   Loan repayment. You can only deduct the interest you paid on a loan if the loan is used for your farming business. You can't deduct interest you paid on a loan that you used for personal expenses.

7.   Net operating losses. If your expenses are more than income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid in prior years. You may also be able to lower your tax in future years. However, if you don't actively participate in the farm activity, your losses may be limited.

8.   Farm income averaging. You may be able to average some or all of the current year's farm income by spreading it out over the past three years. This may cut your taxes if your farm income is high in the current year and low in one or more of the past three years.

9.   Tax credit or refund. You may be able to claim a tax credit or refund of excise taxes you paid on fuel used on your farm for farming purposes.

And, of course, we are always willing to help. If you have questions or want to discuss your specific situation, please give us a call.

 

 

 

What you should do with an identity verification letter from the IRS

In its efforts to combat identity theft, the IRS is stopping suspicious tax returns that have indications of being identity theft, but contain a real taxpayer’s name and/or Social Security number, and sending out Letter 5071C to request that the taxpayer verify his or her identity.

Letter 5071C is mailed through the U.S. Postal Service to the address on the return. It asks taxpayers to verify their identities in order for the IRS to complete processing of the returns if the taxpayers did file it or reject the returns if the taxpayers did not file it.

It is important to understand that the IRS does not request such information via e-mail; nor will the IRS call you directly to ask this information without first sending you a Letter 5071C. The letter number can be found in the upper corner of the page.

Letter 5071C gives you two options to contact the IRS and confirm whether or not you filed the return: You can (1) use the www.idverify.irs.gov site or (2) call a toll-free number on the letter. However, the IRS says that, because of the high volume on its toll-free numbers, the IRS-sponsored website, www.idverify.irs.gov, is the safest, fastest option for taxpayers with Web access.

Before accessing the website, be sure to have your prior-year and current-year tax returns available, including supporting documents, such as Forms W-2 and 1099. You will be asked a series of questions that only the real taxpayer can answer.

Once your identity is verified, you can confirm whether or not you filed the return in question. If you did not file the return, the IRS will take steps at that time to assist you. If you did file the return, it will take approximately six weeks to process it and issue a refund.

You should always be aware of tax scams, efforts to solicit personally identifiable information, and IRS impersonations. However, www.idverify.irs.gov is a secure, IRS-supported site that allows taxpayers to verify their identities quickly and safely. IRS.gov is the official IRS website. Always look for a URL ending with “.gov” — not “.com,” “.org,” “.net,” or other nongovernmental URLs.

 

 

 

Donating a life insurance policy to charity

A number of charities now ask their donors to consider donating life insurance policies rather than (or in addition to) cash in order to make substantially larger gifts than would otherwise be possible. The advantage to donors is that they can make a sizable gift with relatively little up-front cash (or even no cash, if an existing policy is donated). The fact that a charity may have to wait many years before receiving a payoff from the gift is typically not a problem, because charities normally earmark such gifts for their endowment or long-term building funds.

Of course, good reasons may exist for keeping the policy in force (such as to provide liquidity for a taxable estate or to meet the continuing needs of a surviving spouse or disabled child). Still, for individuals with both excess life insurance and a charitable intent, the donation of a life insurance policy may make sense.

If handled correctly, a life insurance policy donation can net the donor a charitable deduction for the value of the policy. A charitable deduction is also available for any cash contributed in future years to continue paying the premiums on a policy that was not fully paid up at the time it was donated. However, if handled incorrectly, no deduction is allowed. For this reason, we encourage you to contact us if you are considering donating a life insurance policy. We can help ensure that you receive the expected income or transfer tax deduction and that the contribution works as planned.

 

 

 

2015 HSA amounts

Health Savings Accounts (HSAs) were created as a tax-favored framework to provide health care benefits mainly for small business owners, the self-employed, and employees of small to medium-size companies.

The tax benefits of HSAs are quite favorable and substantial. Eligible individuals can make tax-deductible (as an adjustment to AGI) contributions into HSA accounts. The funds in the account may be invested (somewhat like an IRA), so there is an opportunity for growth. The earnings inside the HSA are free from federal income tax, and funds withdrawn to pay eligible health care costs are tax-free.

An HSA is a tax-exempt trust or custodial account established exclusively for paying qualified medical expenses of the participant who, for the months for which contributions are made to an HSA, is covered under a high-deductible health plan. Consequently, an HSA is not insurance; it is an account, which must be opened with a bank, brokerage firm, or other provider (i.e., insurance company). It is therefore different from a Flexible Spending Account in that it involves an outside provider serving as a custodian or trustee.

The 2015 maximum contribution and deduction for individual self-only coverage under a high-deductible plan is $3,350, while the comparable amount for family coverage is $6,650. Individuals age 55 or older by the end of 2015 are allowed additional contributions and deductions of $1,000. However, when an individual enrolls in Medicare, contributions cannot be made to an HSA.

For 2015, a high-deductible health plan is defined as a health plan with an annual deductible that is not less than $1,300 for self-only coverage and $2,600 for family coverage, and the annual out-of-pocket expenses (including deductibles and copayments, but not premiums) must not exceed $6,450 for self-only coverage or $12,900 for family coverage.

 

 

 

Tax Strategies Scan: Cut Client Taxes with ETFs

Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.

How to cut your taxes using ETFs: Investors can reduce the tax bill on their portfolio if they boost their investment in exchange-traded funds, which are more tax-efficient than mutual funds and individual stock holdings, according toMarketWatch. While stocks and funds may yield steady dividends over time, selling them could be a difficult decision to make as it would trigger hefty taxes on capital gains. By holding a strong portfolio of ETFs with asset classes that can help achieve investment goals, there will be no need for clients to sell securities except to rebalance the portfolio when they see fit. -- MarketWatch

Tax bills on the rise for fund investors: The seven-year bull market means steady capital gains distributions, but this could mean hefty tax bills for investors, unless their funds invested in tax-sheltered accounts, according toMorningstar. Instead of selling a performing fund, investors may consider selling an average fund that is expected to make big capital gains payouts. They also need to turn off automatic reinvesting for a taxable account that is poised to yield a big payout, and to invest in funds that are tax-efficient. -- Morningstar

Tax-efficient distributions of clients’ retirement assets: Taxpayers need to develop tax-efficient strategies for making distributions from their retirement accounts to ensure they will not outlive their nest egg, writes Mike Cice, chief investment officer of Newtown, Pa.-based Allied Financial Consultants. Many financial advisers offer guidance to clients on how to grow their investments but miss on creating retirement distribution plans that will minimize the impact of taxation, Cice writes. "Perhaps the single most important thing for advisers to know about developing these plans is the critical importance of timing. The sooner you develop these plans, the better." -- The Wall Street Journal

3 ways to lower taxes on your retirement savings: Retirees can minimize the taxes they pay on their nest egg by putting their savings in a Roth 401(k), according to The Motley Fool. Another strategy for retirement savers to reduce the tax burden on their savings is by claiming the Retirement Savings Contributions Credit for up to 50% of their retirement contributions. Clients also need to determine the tax rate they face before and after they retire when making contributions, so they can develop a tax-efficient way of building their nest egg. -- The Motley Fool

 

 

 

IRS Detects Massive Data Breach in 'Get Transcript' Application

BY MICHAEL COHN

The Internal Revenue Service warned of a huge data breach of its online Get Transcript application that allowed the tax returns of approximately 104,000 taxpayers to be accessed by identity thieves.

The IRS said Tuesday that criminals used taxpayer-specific data acquired from non-IRS sources to gain unauthorized access to information on the tax accounts through the Get Transcript application. The data included Social Security information, birth dates and street addresses.

Third parties gained enough information from outside sources before trying to access the IRS site, allowing them to clear a multi-step authentication process, including several personal verification questions that typically are only known by taxpayers themselves.

The matter is under review by the Treasury Inspector General for Tax Administration, along with the IRS’s Criminal Investigation unit, and the Get Transcript application has been shut down temporarily. The IRS said it would provide free credit monitoring services for the approximately 104,000 taxpayers whose accounts were accessed. In total, the IRS has identified 200,000 total attempts to access data and will be notifying all of these taxpayers about the incident.

“What we have is the latest more sophisticated manifestation of a form of identity theft in the sense that we’ve detected and determined that there was unauthorized access to our Get Transcript application,” IRS Commissioner John Koskinen said during a conference call with reporters Tuesday. “That unauthorized access ran from February to May. The Get Transcript application gets you previous filings of tax returns. To try to get through to get that transcript, the criminals had to already have stolen Social Security numbers, names, addresses, and other personal identifiers available and then they had to have enough personal information for each taxpayer to be able to get through the personal-related questions, the so-called ‘out of wallet questions.’”

Koskinen noted that the IRS had about 23 million successful downloads of the Get Transcript application during the filing season, and has identified that there were attempts by identity thieves to get access to the prior tax returns of about 200,000 taxpayers.

“About 100,000 were unsuccessful,” he added. “They could not work through the barriers that we had established, but unfortunately about 104,000 did get through and were able to access earlier tax returns. Those tax returns have basic tax information on them and are mostly used to file a better fraudulent tax return for a refund.”

Koskinen pointed out that the IRS’s filters have gotten increasingly sophisticated, and this year the IRS stopped nearly 3 million suspicious returns “at the door” rather than accepting them for filing and then followed up with taxpayers to authenticate them.

“But those filters depend upon anomalies, and so to the extent that a fraudulent return can look closely like a previously filed tax return, you have a better chance of getting through the filters,” he said. “We think—and we have a lot more analysis that we have to do—that a relatively small number of these incidents, where the 104,000 transcripts were available, turned themselves into refund frauds that were paid out this year, but our real concern is the 200,000 taxpayers. We think that all of them, even those where no-one accessed their earlier returns, need to receive a notice from us advising them of the fact that their Social Security numbers and personal information is in the hands of criminals. All of them will get that notice.”

With the 104,000 where access was gained to their returns, the IRS will provide them with credit-monitoring as well, he added, and for all 200,000 the IRS will mark them in its system to protect the taxpayers against anyone subsequently filing a false return, either this summer or next filing season before they file.

“We greatly regret that this additional information is available to criminals, although as I say it’s primarily attractive for them to file fraudulent refunds going forward,” said Koskinen. “We’ve taken the Get Transcript application down late last week and we won’t put it back up until we’re satisfied that we’ve improved the security.”

He pointed out that the IRS faces the challenge of making the security questions stringent enough so that fraudsters won’t get through, while still enabling legitimate taxpayers to be able to get the tax transcripts when they need them for mortgage applications and the like.

“For the 23 million people who successfully downloaded their transcripts, we have a balance there of making sure they can continue, properly authenticated, to have access to those transcripts without having to either get them in person or call us and have them mailed to them,” said Koskinen. “That’s the situation we are facing. It is clear, as our criminal investigators note, their estimate is 80 percent of the identity theft and refund fraud we’re dealing with is related to organized crime here and around the world, and this is just another example. These are extremely sophisticated criminals with access to a tremendous amount of data. I would stress that this in no way has anything to do with our basic tax-filing system, the data that we have that we collected from 150 million people this year. All of that is secure. This is a single application that you have to have a lot of information to be able to try to access.”

He pointed out that this is not technically a security breach, since the IRS’s basic information is still secured, but it’s a modified form of identity theft, giving the criminals enough data to impersonate the taxpayer.

Senate Finance Committee Chairman Orrin Hatch, R-Utah, said his committee has been working with the IRS since hearing about the data breach late last week from Koskinen.

“Since learning of the breach, the committee has been working with the IRS to better understand the nature of the attack, what information was compromised, and how such a devastating breach could occur,” Hatch said in a statement Tuesday. “That the IRS—home to highly sensitive information on every single American and every single company doing business here at home—was vulnerable to this attack is simply unacceptable. What’s more, this agency has been repeatedly warned by top government watchdogs that its data security systems are inadequate against the growing threat of international hackers and data thieves. The first order of business is for the federal government to determine who was behind the attack and take aggressive action against them. Secondly, we must determine what information was stolen and how it will affect taxpayers. Finally, the Congress and the administration must work together to better protect taxpayer information from cyber threats. Taxpayers must know that the information they send to the IRS is secure. And hackers who would steal that information must know that they will suffer severe consequences for their crimes.”

Koskinen notified Hatch of the data breach late last week by phone, Hatch’s office noted, but as with other law enforcement sensitive matters, the committee did not disclose the breach because it relates to an ongoing investigation.

House Ways and Means Chairman Paul Ryan, R-Wisc., also released a statement upon learning of the IRS data breach. "While the committee is seeking more information about the situation, it's deeply concerning that taxpayer information has been compromised,” said Ryan. “Protecting the taxpayer is supposed to be the IRS’s top priority, and we need answers from them."

Rep. Sander Levin, D-Mich., the ranking Democrat on the House Ways and Means Committee, said he had also been briefed by Koskinen about the data breach. “I’ve been briefed by Commissioner Koskinen on Friday and again today, and he has expressed his strongest commitment to protecting taxpayer information,” Levin said in a statement. “He conveyed that a criminal investigation has been launched and the notification of taxpayers is underway. The commissioner also assured me that the IRS is reviewing its systems to get to the bottom of how an organized criminal syndicate was able to use taxpayer information stolen from non-IRS sources to access taxpayer data in the ‘Get Transcript’ system. It is important that members of Congress work together to ensure that the IRS has adequate resources to carry out the vital priority of protecting confidential taxpayer information.”

The 104,000 taxpayers whose Get Transcript accounts were accessed will receive free credit monitoring. The IRS said the taxpayers will receive specific instructions so they can sign up for the credit monitoring. The outreach letters will not request any personal identification information from taxpayers. In addition, the IRS is marking the underlying taxpayer accounts on its core processing system to flag for potential identity theft to protect taxpayers going forward. The letters will be mailed out starting later this week and will include additional details for taxpayers about the credit monitoring and other steps. At this time, the IRS said no action is needed by taxpayers outside these affected groups.

The IRS said it is also continuing to conduct further reviews on those instances where the transcript application was accessed, including how many of those households filed taxes in 2015. The agency noted that it is possible that some of these transcript accesses were made with an eye toward using them for identity theft for next year’s tax season.

The IRS emphasized that this incident involves one application involving transcripts. It does not involve other IRS systems, such as core taxpayer accounts or other applications, such as Where’s My Refund. The IRS said it will be working aggressively to protect affected taxpayers and strengthen its protocols even further going forward.

 

 

 

IRS Criminal Investigation Helps Bust FIFA Officials

BY MICHAEL COHN

The Internal Revenue Service’s Criminal Investigation unit was among the law enforcement agencies involved in indicting nine officials from FIFA, the international soccer federation that hosts the World Cup, along with five corporate executives involved in a massive bribery scheme.

A 47-count indictment was unsealed early this morning in federal court in Brooklyn charging 14 defendants with racketeering, wire fraud, and money laundering conspiracies, tax evasion and other offenses, in connection with a 24-year scheme to corrupt international soccer. The guilty pleas of four of the individual defendants and two corporate defendants were also unsealed Wednesday.

The defendants charged in the indictment include high-ranking officials of the Fédération Internationale de Football Association (FIFA), the organization responsible for the regulation and promotion of soccer worldwide, along with leading officials of other soccer governing bodies that operate under FIFA. The defendants Jeffrey Webb and Jack Warner—the current and former presidents CONCACAF, the continental confederation under FIFA headquartered in the U.S.—are among the soccer officials charged with racketeering and bribery offenses. The defendants also include U.S. and South American sports marketing executives who are alleged to have systematically paid and agreed to pay well over $150 million in bribes and kickbacks to obtain lucrative media and marketing rights to international soccer tournaments.

The guilty pleas of the four individual and two corporate defendants that were also unsealed today include the guilty pleas of Charles Blazer, the long-serving former general secretary of CONCACAF and former U.S. representative on the FIFA executive committee; José Hawilla, the owner and founder of the Traffic Group, a multinational sports marketing conglomerate headquartered in Brazil; and two of Hawilla’s companies, Traffic Sports International, Inc. and Traffic Sports USA, Inc., which is based in Florida.

“The indictment alleges corruption that is rampant, systemic and deep-rooted both abroad and here in the United States,” said Attorney General Loretta Lynch in a statement. “It spans at least two generations of soccer officials who, as alleged, have abused their positions of trust to acquire millions of dollars in bribes and kickbacks. And it has profoundly harmed a multitude of victims, from the youth leagues and developing countries that should benefit from the revenue generated by the commercial rights these organizations hold, to the fans at home and throughout the world whose support for the game makes those rights valuable. Today’s action makes clear that this Department of Justice intends to end any such corrupt practices, to root out misconduct, and to bring wrongdoers to justice—and we look forward to continuing to work with other countries in this effort.”

Lynch thanked government authorities in Switzerland, along with several other international partners, for their assistance in the investigation, which also involved the FBI and the IRS.

“When leaders in an organization resort to cheating the very members that they are supposed to represent, they must be held accountable,” said IRS Criminal Investigation chief Richard Weber. “Corruption, tax evasion, and money laundering are certainly not the cornerstones of any successful business. Whether you call it soccer or football, the fans, players, and sponsors around the world who love this game should not have to worry about officials corrupting their sport. This case isn’t about soccer, it is about fairness and following the law. IRS CI will continue to investigate financial crimes and follow the money wherever it may lead around the world, leveling the playing field for those who obey the law.”

FIFA includes 209 member associations, each of which represents organized soccer in a particular nation or territory, including the U.S. and four of its overseas territories. FIFA also recognizes six continental confederations that help govern soccer in different regions of the world. The U.S. Soccer Federation is one of 41 member associations of the confederation known as CONCACAF, which has been headquartered in the U.S. throughout the period charged in the indictment. The South American confederation, known as CONMEBOL, is also a focus of the indictment.

One key way the enterprise derives revenue is to commercialize the media and marketing rights associated with soccer events and tournaments. The organizing entity that owns those rights—as FIFA and CONCACAF do with respect to the World Cup and the Gold Cup, their respective flagship tournaments—sells them to sports marketing companies, often through multi-year contracts covering multiple editions of the tournaments. The sports marketing companies, in turn, sell the rights downstream to TV and radio broadcast networks, major corporate sponsors, and other sub-licensees who want to broadcast the matches or promote their brands. The revenue generated from these contracts is substantial: according to FIFA, 70 percent of its $5.7 billion in total revenues between 2011 and 2014 was attributable to the sale of TV and marketing rights to the 2014 World Cup.

The indictment alleges that, between 1991 and the present, the defendants and their co-conspirators corrupted the enterprise by engaging in various criminal activities, including fraud, bribery, and money laundering. Two generations of soccer officials allegedly abused their positions of trust for personal gain, frequently through an alliance with unscrupulous sports marketing executives who shut out competitors and kept highly lucrative contracts for themselves through the systematic payment of bribes and kickbacks. All told, the soccer officials are charged with conspiring to solicit and receive well over $150 million in bribes and kickbacks in exchange for their official support of the sports marketing executives who agreed to make the unlawful payments.

Most of the schemes alleged in the indictment relate to the solicitation and receipt of bribes and kickbacks by soccer officials from sports marketing executives in connection with the commercialization of the media and marketing rights associated with various soccer matches and tournaments, including FIFA World Cup qualifiers in the CONCACAF region, the CONCACAF Gold Cup, the CONCACAF Champions League, the jointly organized CONMEBOL/CONCACAF Copa América Centenario, the CONMEBOL Copa América, the CONMEBOL Copa Libertadores, and the Copa do Brasil, which is organized by the Brazilian national soccer federation, CBF. Other alleged schemes relate to the payment and receipt of bribes and kickbacks in connection with the sponsorship of CBF by a major U.S. sportswear company, the selection of the host country for the 2010 World Cup, and the 2011 FIFA presidential election. Questions have also been raised over the selection of Qatar to host the 2022 World Cup, and whether bribery was part of the process.

 

 

 

 

Excess Short Term Loss Results In Phantom Tax Liability on Lost Dollars Further Disproves the Myth That the IRC is Loaded with Tax Perks for the Rich

Jay Katz Freelance Editing

Whether the rich pay their fair share of tax has become a partisan issue dividing the country. Unfortunately, those who believe it to be true focus like a laser beam on the preferential tax rates for long term capital gain and dividends (15% or 20%) while ignoring a multitude of provisions that result in devastating negative tax consequences that reverse the tax benefits of those rates. Any reasoned conclusion on this issue must consider the aggregate effect of positive and negative tax provisions. 

In a prior posting, I demonstrated how an investor with excessive capital losses would pay large amounts of tax in spite of having no economic income. In my example, a taxpayer with $100,000 of capital gain and $300,000 of capital losses may only deduct $103,000 because capital loss is only allowed as a deduction to the extent of capital gain, plus $3,000. Consequently, because the taxpayer cannot offset his or her economic loss of $197,000 against an equivalent amount of other income, this taxpayer pays tax on lost funds ($197,000) he or she does not have. If that reality was taken into account, the marginal rate paid by this “rich” 3384In this posting, I want to take a deeper look into short term capital gains and losses. Obviously, one reason for the preferential rate on long term capital gain is to encourage investment. If an individual uses after tax dollars to purchase stock, those funds are unavailable for personal consumption for the duration of the investment. Moreover, there is always the risk of losing all or part of the investment. 

However, to qualify for the preferential capital gain rate, the stock must be held for more than a year. So if less than a year into the investment, an investor sells the stock because of a concern the price may decline in value, any gain would be short term, treated as ordinary income, and, thus, not qualify for the preferential rate. On the other hand, any loss would be a short term capital loss. So here is the rub. The gain would be taxed as ordinary income subject to the highest tax rates. Conversely, the loss would be deductible only to the extent of capital gain plus $3,000. 

To illustrate this point, ignoring personal exemptions, itemized deductions and alternative minimum tax, assume in a given year a single taxpayer has $353,000 of interest and wage income. In addition, the taxpayer has short term capital gain of $103,000, or a total income of $456,000. Because the short term gain does not qualify for the preferential rates, the taxpayer would owe $40,788 on the short term capital gain (taxed at 39.6%). The taxpayer’s total tax would be $157,105 on a total of $456,000 of income, or 34.45%. Obviously, there is no tax advantage for this investor. 
Change the facts and assume the taxpayer has short term capital loss of $103,000. In this case, only $3,000 of the loss would be deductible. Consequently, this taxpayer would have taxable income of $350,000, even though her economic income was only $253,000 ($353,000 minus $100,000 of non-deductible short term capital loss). The tax on $350,000 of income would be $115,129 as to compared to a tax $76.717 on economic income of $253,000. Thus, because the taxpayer could not deduct $100,000 of short term loss, this taxpayer paid $38,412 on dollars she lost ($115,129 minus $76,717). Expressed as a percentage of income, the rate is 45.51%. The bottom line is due to an excess short term capital loss, the taxpayer was actually penalized by having to pay tax at a rate of over 10% greater than it would have been on an equivalent amount of short term capital gain. 

So with such an imbalance between the treatment of short term capital gain and short term capital loss unfavorable to an investor, the taxpayer is whipsawed. If there is a gain, it is taxed at ordinary tax rates. If there is an excess loss, the taxpayer ends up paying tax on the loss. 

 

 

 

Tax and Financial Benefits from Hiring Your Children

It can be difficult in the current job market for young people and recent college graduates to find full time and summer jobs. Business owners with children in this situation may be able to provide them with valuable experience and income while generating tax and financial savings for themselves.

As a business owner, you may be able to turn high-taxed income into tax-free or low-taxed income, achieve Social Security tax savings (depending on how your business is organized) and even make retirement plan contributions for your child.

In addition, employing a child age 18 (or if a full-time student, age 19 to 23) may be a way to save taxes on the child's unearned income.

Here are the key considerations.

Convert High-Taxed Income into Tax-Free or Low-Taxed Income

You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some of your business earnings to a child as wages for services performed by him or her. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child's salary must be reasonable.

Example: A business owner operating as a sole proprietor is in the 39.6% tax bracket. He hires his 17-year-old daughter to help with office work full-time during the summer and part-time into the fall. She earns $6,100 during the year and doesn't have any other earnings. The business owner saves $2,415.60 (39.6% of $6,100) in income taxes at no tax cost to his daughter, who can use her $6,300 standard deduction (for 2015) to completely shelter her earnings. The business owner could save an additional $2,178 in taxes if he could keep his daughter on the payroll longer and pay her an additional $5,500. She could shelter the additional income from tax by making a tax-deductible contribution to her own IRA.

Family taxes are cut even if the child's earnings exceed his or her standard deduction and IRA deduction. That's because the unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent's higher rate.

Keep in mind that bracket shifting works even for a child who is subject to the Kiddie Tax, which causes the child's investment income in excess of $2,100 for 2015 to be taxed at the parent's marginal rate. The Kiddie Tax has no impact on the child's wages and other earned income. It only affects unearned income.

The Kiddie Tax doesn't apply to a child who is age 18 or a full-time student age 19 through 23, if the child's earned income for the year exceeds one-half of his or her support. Therefore, employing a child age 18 or a full-time student age 19 to 23 could also help to avoid the Kiddie Tax on his or her unearned income.

For children under age 18, there is no earned income escape hatch from the Kiddie Tax. But in all cases, earned income can be sheltered by the child's standard and other deductions, and earnings exceeding allowable deductions will be taxed at the child's low rates.

What about income tax withholding? Your business will probably have to withhold federal income taxes on your child's wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for the preceding year and expects to have none for this year. However, exemption from withholding can't be claimed if:

  1. The employee's income for 2015 exceeds $1,050 and includes more than $350 of unearned income (such as dividends), and
  2. The employee can be claimed as a dependent on someone else's return. Keep in mind that your child probably will get a refund for part or all of the withheld tax when he or she files a return for the year.

You Can Also Save Social Security Tax

If your business isn't incorporated, you can also save some self-employment (Social Security) tax dollars by shifting some of your earnings to a child. That's because services performed by a child under the age of 18 while employed by a parent isn't considered employment for FICA tax purposes.

Example: A sole proprietor who usually takes $120,000 of earnings from the business pays $5,700 to her 17-year-old child. The business owner's self-employment income would be reduced by $5,700, saving $165.30 (the 2.9% Medicare health insurance portion of self employment tax the owner would have paid on the $5,700 shifted to the daughter). This doesn't take into account the sole proprietor's income tax deduction for one-half of his or her own Social Security taxes.

A similar but more liberal exemption applies for the federal unemployment tax (FUTA), which exempts earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his or her parents.

Note that there is no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there's no extra cost to your business if you're paying a child for work that you'd pay someone else to do anyway.

Retirement Benefits

Your business also may be able to provide your child with retirement benefits, depending on the type of plan it has and how it defines qualifying employees.

For example, if your business has a simplified employee pension (SEP), a contribution can be made for the child up to 25% of his or her earnings, but the contribution cannot exceed $53,000 for 2015. The child's participation in the SEP won't prevent the child from making tax-deductible IRA contributions as long as modified adjusted gross income (computed in a special way) is below the level at which deductions for IRA contributions begin to be disallowed. For 2015, that amount is $61,000 for a single individual.

If you have any questions about how these rules apply in your particular situation, contact your tax adviser. Also keep in mind that some of the rules (such as the maximum amount they can earn tax-free) change from year to year, and may require your income-shifting strategy to change, too.

 

 

 

Howard Stern Airs Taxpayer Phone Call to IRS

BY MICHAEL COHN

A phone call between a taxpayer and an Internal Revenue Service collection employee was broadcast on Howard Stern’s Sirius XM radio show when the IRS employee accidentally put himself on hold after calling into Stern’s show.

The shock jock, known as the “King of All Media,” kept trying to get the attention of the IRS employee, identified only as “Jimmy” in Long Island, but he continued talking with the taxpayer about her payments, as Kelly Phillips Erb of Forbes reported.

The phone number of the unidentified taxpayer, from Cape Cod, Mass., was even broadcast over the air, and she told a CBS news program in Boston that listeners around the country quickly began calling and texting her while the conversation was being aired. She is worried about her tax debts being disclosed so publicly and said she has felt devastated and violated by the situation. “No one should go through something like this,” she said.

She asked the IRS employee if he was talking with Stern, and he admitted that he had been on hold with the call-in show.

During the call, Stern and his sidekick, Robin Quivers, joked about the IRS employee’s advice to the taxpayer on her payment plan. “I’m learning so much,” said Stern. “I feel like I’m in math class and I’m flunking because I don’t know one thing he’s saying. I think I’m going to bail on this guy. By the way, this is the most boring job ever. I’d rather live in my parent’s basement if I had to do that. I’d give out all the wrong information. All right, dude, later!”

An IRS spokesperson told the CBS Boston station, “We are aware of this troubling situation, and we are currently reviewing the matter. The IRS takes the confidentiality of taxpayer information very seriously, and we have high standards that we expect and require employees to follow.”

 

 

Actress Melissa Gilbert Paying Off $360,551 Tax Lien

BY MICHAEL COHN

 

Melissa Gilbert, who starred in the TV series “Little House on the Prairie,” is reportedly paying off a big tax lien from the Internal Revenue Service.

The IRS filed a tax lien against Gilbert in February for $360,551, according to the Detroit News. She owes taxes from 2011, 2012 and 2013. She moved to Michigan two years ago from California, where she is also facing state tax liens amounting to $112,527. She and her husband, actor Timothy Busfield, who starred in the series “Thirtysomething,” moved to Michigan in 2013 after Gilbert’s divorce in 2011 from another TV actor, Bruce Boxleitner, who starred in “How the West Was Won.”

 

Gilbert blamed her money troubles on the recession and her divorce. “Like so many people across the nation, the recession hit me hard,” she said in a statement to theDetroit News. “That, plus a divorce and a dearth of acting opportunities the last few years, created a perfect storm of financial difficulty for me. ... I've set up an installment plan to fully pay off my debt and will continue to work as hard as I can to erase this debt and dig myself out of this hole. I am absolutely positive that I can do it.”

 

Gilbert has appeared in recent years on the dance competition show, “Dancing with the Stars.” She, Busfield and their two children are planning to move out of their rented home to a log house in Michigan, which Gilbert has dubbed, “our own Little House in the Big Woods.” Gilbert’s neighbors and landlord praised her to the Detroit News and she has participated in charity work since moving to Michigan.

 

 

IRS, Industry, States Take New Steps Together to Fight Identity Theft, Protect Taxpayers

WASHINGTON — The Internal Revenue Service joined today with representatives of tax preparation and software firms, payroll and tax financial product processors and state tax administrators to announce a sweeping new collaborative effort to combat identity theft refund fraud and protect the nation's taxpayers.

 

The agreement — reached after the project was originally announced March 19 — includes identifying new steps to validate taxpayer and tax return information at the time of filing. The effort will increase information sharing between industry and governments. There will be standardized sharing of suspected identity fraud information and analytics from the tax industry to identify fraud schemes and locate indicators of fraud patterns. And there will be continued collaborative efforts going forward.

 

"This agreement represents a new era of cooperation and collaboration among the IRS, states and the electronic tax industry that will help combat identity theft and protect taxpayers against tax refund fraud," IRS Commissioner John Koskinen said. "We've made tremendous progress, and we will continue these efforts. Taxpayers filing their tax returns next filing season should have a safer and more secure experience."

Koskinen convened a Security Summit on March 19 with the chief executive officers and leaders of private sector firm and federal and state tax administrators to discuss emerging threats on identity theft and expand existing collaborative efforts to stop fraud.

 

Three specialized working groups were established as part of the Summit, with members from the IRS, states and industry co-chairing and serving on each team. During the past 12 weeks, the teams focused on developing ways to validate the authenticity of taxpayers and information included on tax return submissions, information sharing to improve detection and expand prevention of refund fraud, and threat assessment and strategy development to prevent risks and threats.

 

The groups agreed to several important new initiatives in this unprecedented effort, including:

 

*Taxpayer authentication. The industry and government groups identified numerous new data elements that can be shared at the time of filing to help authenticate a taxpayer and detect identity theft refund fraud. The data will be submitted to the IRS and states with the tax return transmission for the 2016 filing season. Some of these issues include, but are not limited to:

  • Reviewing the transmission of the tax return, including the improper and or repetitive use of Internet Protocol numbers, the Internet ‘address’ from which the return is originating.
  • Reviewing computer device identification data tied to the return’s origin.
  • Reviewing the time it takes to complete a tax return, so computer mechanized fraud can be detected.
  • Capturing metadata in the computer transaction that will allow review for identity theft related fraud. 

*Fraud identification. The groups agreed to expand sharing of fraud leads. For the first time, the entire tax industry and other parts of the tax industry will share aggregated analytical information about their filings with the IRS to help identify fraud. This post-return filing process has produced valuable fraud information because trends are easier to identify with aggregated data. Currently, the IRS obtains this analytical information from some groups. The expanded effort will ensure a level playing field so everyone approaches fraud from the same perspective, making it more difficult for the perpetration of fraud schemes.

 

*Information assessment. In addition to continuing cooperative efforts, the groups will look at establishing a formalized Refund Fraud Information Sharing and Assessment Center (ISAC) to more aggressively and efficiently share information between the public and private sector to help stop the proliferation of fraud schemes and reduce the risk to taxpayers. This would help in many ways, including providing better data to law enforcement to improve the investigations and prosecution of identity thieves.

 

*Cybersecurity framework. Participants with the tax industry agreed to align with the IRS and states under the National Institute of Standards and Technology (NIST) cybersecurity framework to promote the protection of information technology (IT) infrastructure. The IRS and states currently operate under this standard, as do many in the tax industry.

 

*Taxpayer awareness and communication. The IRS, industry and states agreed that more can be done to inform taxpayers and raise awareness about the protection of sensitive personal, tax and financial data to help prevent refund fraud and identity theft. These efforts have already started, and will increase through the year and expand in conjunction with the 2016 filing season.

 

"Industry, states and the IRS all have a role to play in this effort," Koskinen said. "We share a common enemy in those stealing personal information and perpetrating refund fraud and we share a common goal of protecting taxpayers. We want to build these changes into the DNA of the entire tax system to make it safer."

Many major system and process changes will be made this summer and fall by the participants in order to be ready for the 2016 filing season. The public-private partnership also will continue this cooperative, collaborative approach to address not just short-term issues but longer-term issues facing the tax community and taxpayers.

 

The partnership parties recognize the need to continuously improve our tax system defenses for combating this threat to taxpayers and our tax system, Koskinen added. Those defenses include a continually improving multi-level identity proofing and authentication capability that anticipates and stops threats.

 

"I applaud the industry and the states for stepping forward to take on this challenge and making the needed changes," Koskinen. "This is good for taxpayers, good for tax administrators and good for the tax community."

Koskinen emphasized that a continuing theme throughout this effort focuses on protecting taxpayer information and privacy. “Working together we can achieve results that none of us, working alone, could accomplish,” he said.

 

In addition to companies from the private sector, the summit team included several groups including the Electronic Tax Administration Advisory Committee (ETAAC), the Federation of Tax Administrators (FTA) representing the states, the Council for Electronic Revenue Communication Advancement (CERCA) and the American Coalition for Taxpayer Rights (ACTR). 

 

 

Play Slots, Pay Taxes: The IRS Wants a Piece of More Jackpots

BY BEN STEVERMAN

 

 Nothing kills the thrill of a big-money win at the casino quite like a tax form — and soon the grasp of the taxman could be felt before the jackpot celebration stops at a lucky slot machine.

By law, gamblers must pay taxes on every dollar they win at casinos, at racetracks, and even from informal bets on football games. Losses, of course, generate no tax liability, and in practice it's quite difficult for the Internal Revenue Service to keep tabs on exactly how well gamblers are doing. At slot machines, for instance, only jackpots of $1,200 or more must be reported to the IRS. A lucky player winning a big jackpot will find the machine automatically shuts down until a casino employee come over with tax forms. 

 

As part of a broader re-write of gambling tax rules, the IRS earlier this year floated the idea of lowering the mandatory-reporting threshold for slot machines to $600. Gamblers reacted with horror, and so far more than more than 14,000 people submitted comments on the regulations. “This is our money,” wrote Orlando Rodriguez, in one of thousands of angry comments to the IRS. “Let us enjoy what little we win.”

 

The irate gamblers have a point. Few people win enough over time to evade taxes in a meaningful way. The vast majority of casual gamblers end up losing money on their hobby. A rare jackpot might trigger a tax form but most people who play long enough will find the taxable winnings are eaten away by losses before the tax bill comes due. A reportable jackpot may not even offset a gambler’s losses from earlier that same day. “We are only winning a small fraction of the moneys we have played,” Precilla Brown of Houston told the IRS.

 

If a gambler keeps track of every wager placed, she can use losses on her end-of-the-year tax forms to offset any winnings. But few casual gamblers keep track. And, anyway, the losses can only be deducted from the winnings if a gambler itemize her tax returns, something only about a third of American taxpayers do. Raun Kopp of Ohio, in another comment filed with IRS, counts himself among those gamblers who don't itemize: “We have no way to offset winnings with our gambling losses,” he wrote. It “seems the IRS will tax me if I win but gives me no way to offset that. Don’t do it!”

 

Casinos also oppose changing the reporting threshold. The industry's lobbying group, the American Gaming Association, argues the change would be an expensive hassle. Casinos would need to update their systems and hire extra staff to handle more frequent reportable jackpots. Extra labor could cost Caesars Entertainment an extra $18.5 million per year, the company told the IRS. 

 

The irony is that there’s a lot for gamblers to like in the full set of IRS proposals, an update to regulations first put in place in 1977. The federal government wants to simplify confusing tax reporting rules at racetracks, something horse race enthusiasts believe is long overdue. Casinos might soon be required to use electronic loyalty cards to track each gambler’s play over an entire day, a reform that could lower the amount of winnings reported to the IRS. Gamblers would be able to automatically offset any big jackpots with their losses from the same session. The American Gaming Association, however, say it would be impractical for casinos to use their loyalty cards this way.

 

The IRS is set to hold a hearing on its proposed regulations on June 17. Daniel Sahl, of the Center for Gaming Innovation at the University of Nevada, Las Vegas, doesn’t expect a $600 reporting threshold to make it into any final rule. It would make slot machine gambling a lot less fun, he says, and that would hurt the other revenue that states get from gambling. Also, Sahl argues, it just seems unfair: “You’re taxing people for money they didn’t really earn.”

 

 

 

IRS Changes Identity Theft Policy

BY MICHAEL COHN

 

The Internal Revenue Service has agreed to change its policy on identity theft and provide victims with copies of the fraudulent tax returns that have been filed under their names by scammers.

The move comes in response to a request from Sen. Kelly Ayotte, R-N.H., who wrote to IRS Commissioner John Koskinen last month urging the IRS to provide tax-related identity theft victims with copies of fraudulent returns, which the agency had refused to do, citing privacy concerns.

 

In response to Ayotte on Thursday, Koskinen wrote, “As a result of your letter, we have decided to change our policy regarding disclosure of fraudulent identity theft returns to victims whose name and SSN the fraudulent return was filed under...We will put together a procedure that will enable victims to receive, upon request, redacted copies of fraudulent returns filed in their name and SSN.”

 

Ayotte said she is pleased with the change in policy. "I'm glad that the IRS has agreed to my request to reverse its policy and provide identity theft victims with copies of fraudulent tax returns so they can take proper steps to secure their personal information,” she said in a statement last Friday. “Victims of identity theft face significant emotional and financial hardships, and they shouldn't be left in the dark about the extent of the theft. This is a positive step that will help them protect themselves and their families."

 

Ayotte said she became aware of the issue after hearing from New Hampshire victims of identity theft who told her that the IRS's refusal to provide copies of fraudulent tax returns prevented them from knowing what information was stolen.

 

Last month, Ayotte helped introduce the Social Security Identity Defense Act of 2015, which would require the IRS to notify potential victims of identity theft, something the agency has failed to do in the past. It also requires that the IRS notify law enforcement and that the Social Security Administration notify employers who submit fraudulently used Social Security numbers. The bill adds civil penalties and extends jail time for those who fraudulently use an individual's Social Security number.

 

The IRS revealed a massive data breach last week in which criminals managed to access approximately 104,000 tax returns by using the IRS’s online Get Transcript application (see IRS Detects Massive Data Breach in ‘Get Transcript’ Application). Koskinen will be facing a hearing Tuesday before the Senate Finance Committee on Tuesday to explain the breach.

 

 

IRS Faces Dilemma over Data Breach

By Michael Cohn 

 

The Internal Revenue Service discovered last month that criminals accessed around 104,000 tax returns through its Get Transcript application and tried to get hold of approximately 100,000 more.

 

But the IRS’s efforts to stop identity theft are running squarely into another priority: to try to get more taxpayers to use online self-service options to save money at the cash-strapped agency, whose customer service levels have been dropping precipitously.

 

The IRS announced the data breach last week and said it would provide free credit monitoring for the affected taxpayers (see IRS Detects Massive Breach in ‘Get Transcript’ Application). The Senate Finance Committee held a hearing Tuesday to question IRS Commissioner John Koskinen and Treasury Inspector General for Tax Administration J. Russell George about the extent and causes of the data breach (see IRS Risks Data Breach Repeat While Expanding Online Services).

 

The officials revealed a number of key details about the breach, including revelations that the organized criminals may have come from a number of countries and not just Russia, as previously reported. The Inspector General found that domains from several other countries had also been traced back to the attack, although he acknowledged that cybercriminals are able to make their Internet addresses appear to originate in other places than where they actually are located. Koskinen said the IRS is seeing an increasing number of attacks on its computer systems from hackers in Eastern Europe and Asia.

The IRS commissioner pointed out that the Get Transcript application was an effort by the IRS to make taxpayers’ interactions with the agency easier. The online application launched in January of last year and allows taxpayers to view and print a copy of their prior-year tax information in a matter of minutes. 
 

“Prior to the introduction of this online tool, taxpayers had to wait five to seven days after placing an order by phone or by mail to receive a paper transcript by mail,” said Koskinen. He noted that taxpayers use the tax transcripts for a variety of financial activities, such as verifying their incomes when applying for a mortgage or student loan.

 

However, the wealth of sensitive financial information available in the online application also made it an attractive target for cybercriminals. Koskinen pointed out that the so-called “Darknet” already has a vast trove of financial information available to identity thieves. Although the IRS has put in place a number of filters in recent years to deter identity theft, including the use of so-called “out-of-wallet” questions to verify someone’s identity before giving them access to a tax transcript, the hackers already had much of this financial information handy. They were able to use it to get access to around 104,000 tax returns, which in turn gave them access to Social Security numbers and other information for those taxpayers’ spouses and dependents.

The IRS has actually been improving its ability to deter identity theft, as a recent report from the Inspector General showed (see IRS Gets Better at Detecting Identity Theft). Over the past few years, nearly 2,000 individuals have been convicted in connection with refund fraud related to identity theft, Koskinen noted.

 

Koskinen and George pointed out that the cybercriminals already had stolen identifying information for many of the taxpayers before trying to access their transcripts. That information then allowed them to answer the “out-of-wallet” questions, which are a customer authentication method that is now fairly standard in the financial services industry. The questions are designed to elicit information that only taxpayer themselves should know, such as the amount of their monthly mortgages or car payments. Before getting access to the online tax transcripts, taxpayers are also supposed to provide their own Social Security number, birth date, tax-filing status and home address.

 

Unfortunately, identity thieves already oftentimes have that information available to them, and they now have the funds and resources to run sophisticated data-mining programs to find and match patterns in the information, allowing them to get access to the transcripts. The IRS did not detect the suspicious activity in the Get Transcript app until mid-May because it was consumed by the workload of coping with tax season and initially thought it was a denial of service attack by hackers.

 

The IRS’s filters caught about 100,000 attempts at accessing the tax transcripts and stopped them, and it caught many of the fraudulent tax returns as well. Koskinen reported that about 35,000 taxpayers had already filed their 2014 income tax returns before the unauthorized access attempts, so these taxpayers’ 2014 returns and refund claims were not affected by the fraudulent activity, because any fraudulent returns that were subsequently filed in their names would be automatically rejected by the IRS’s systems. For another 33,000, Koskinen said there is no record of any tax return having been filed in 2015, perhaps because the Social Security numbers associated with those individuals may belong to those who have no obligation to file, such as children, or anyone below the tax-filing threshold.

 

Unsuccessful attempts were made to file approximately 23,500 returns. These 23,500 returns were flagged by the IRS’s fraud filters and stopped by its processing systems before the tax refunds were issued. Since the data breach occurred, approximately 13,000 suspect returns were filed for tax year 2014 for which the IRS issued refunds. The refunds issued for these 13,000 suspect returns totaled about $39 million, and the average refund was approximately $3,000 per return. “We are still determining how many of these returns were filed by the actual taxpayers and which were filed using stolen identities,” said Koskinen in his opening statement. “We will work with any of these affected taxpayers who had fraudulent returns filed in their name.”

 

However, the IRS has another battle on its hands besides fending off identity thieves and computer hackers. That’s with Congress. The IRS has seen its budget cut for the past five years at the hands of lawmakers, with funding for the agency reduced $1.2 billion since 2010.

 

Koskinen has been trying to make the case to Congress to increase his agency’s budget, but he has come under criticism from lawmakers who accuse the IRS of diverting funds away from taxpayer service and security to other functions, such as paying outside legal counsel and implementing the Affordable Care Act (see IRS Accused by Congress of Diverting Funds from Customer Service). This past tax season, IRS customer service employees have been able to answer fewer than 40 percent of the taxpayer calls that the agency received, and wait times have been longer than ever before at the IRS’s in-person Taxpayer Assistance Center offices.

 

One of the IRS’s solutions has been to develop online customer self-service applications like Get Transcript and Where’s My Refund so taxpayers won’t have to call into the IRS’s busy call centers and receive so-called “courtesy disconnects,” a polite way of hanging up the phone on taxpayers and suggesting they try again later.

Now the IRS has taken its Get Transcript application offline to deter further identity theft attempts and Koskinen told lawmakers the app wouldn’t go back online until the IRS can be assured it is secure. But the IRS is also coping with an outdated set of information technology systems, some of them dating back to the Kennedy administration. It has to pay Microsoft extra to continue providing support for Windows XP because it hasn’t been able to upgrade many of its desktop computers to more recent versions of Windows. The Government Accountability Office and the Treasury Inspector General for Tax Administration have both issued reams of reports over the years warning about the lapses in computer security at the agency.

 

Now, as the IRS attempts to compensate for declining levels of customer service with self-service applications, it may have to go back to square one to make sure those apps are secure enough to deter increasingly deep-pocketed and organized cybercriminals.

 

The IRS is asking Congress for more funding and also to allow it to make changes like requiring employers to file W-2 and 1099 statements earlier so they can be matched up with tax returns faster by the IRS, while also masking the Social Security numbers on those same forms to keep them away from identity thieves. The IRS has also stepped up its efforts to work with the private sector, including online tax software developers, to make sure their systems are secure after identity thieves used such systems last tax season to file fraudulent federal and state tax returns.

 

It’s going to be a tall order for a Congress that has grown increasingly skeptical of the IRS in the wake of the scandal over applications for tax-exempt status from political organizations. At the hearing, lawmakers asked George when he will release a final report on the emails from the former director of exempt organizations, Lois Lerner, now that most of the emails have been recovered by investigators, and they asked Koskinen when the IRS will come out with its revised regulations for organizations operating under Section 501(c)4 of the tax code. The initial set of proposed regulations garnered fierce reactions from both sides of the political spectrum, and Koskinen quickly shelved it. Neither he nor George was able to provide a definitive answer, although George hopes to release his report by the end of the month. As controversy continues over these and other matters, the IRS will have a difficult time safeguarding the security of the systems it is forced to rely on to operate more cost effectively while facing challenges from cybercriminals and lawmakers alike.

 

Do you think the IRS will be able to make its systems more secure while providing online access for critical applications for taxpayers?

 

 

Nexus Issues: Looking for a Cure

BY ROGER RUSSELL

 

The House Judiciary Committee, through its Subcommittee on Regulatory Reform, Commercial and Antitrust Law, held a hearing Tuesday on nexus issues involving three bills before the Committee.

 

The bills are the Mobile Workforce State Income Tax Simplification Act of 2015, the Digital Goods and Services Tax Fairness Act of 2015 and the Business Activity Tax Simplification Act of 2015. The unifying theme of the legislation, according to Chairman Bob Goodlatte, R-Va., is “No Regulation Without Representation.”

 

Since the Supreme Court held in the 1992 case of Quill v. North Dakota that states may tax interstate commerce if there is a “substantial nexus” to the taxing state, states are increasingly exploiting the gray area in the law to tax and regulate beyond their borders, according to Goodlatte.

 

 “For example, California is now requiring that out-of-state farmers who want to sell eggs in California comply with California cage-size requirements, which are twice the industry standard,” he said. “The Alabama Attorney General described the new law as ‘California’s attempt to protect its economy from its own job-killing laws by extending those laws to everyone else in the country.’ This is precisely the sort of protectionism that the Commerce Clause is intended to prevent.”

“These bills codify clear boundaries as to a state’s authority to tax individuals, businesses and products,” said Grover G. Norquist of Americans for Tax Reform, who testified at the hearing. “These boundaries prevent the taxman’s arm from growing forever longer and from always coming back for seconds.”

 

“Chairman Goodlatte sees a commonality among these bills as addressing the extent to which a state’s jurisdiction to tax should extend to activities that occur outside its borders,” said Arthur Rosen, a member of McDermott Will & Emery LLP, which successfully represented the taxpayers in the landmark Quill decision. Rosen spoke as a representative of the Coalition for Rational and Fair Taxation (CRAFT).

 

He described the history of the Business Activity Tax Simplification Act of 2015, or BATSA, which has been introduced and re-introduced several times in Congress.

“Although BATSA has been around for quite a while, for various reasons Congress appears to have had higher priorities in each session, so we have not been able to move it as far as we hoped,” he said. “However, there is a reasonable likelihood of enactment in this Congress.”

 

The issue in BATSA is a totally separate issue from the Marketplace Fairness Act, Rosen noted. “The focus in MFA is on when a seller has to collect the tax from a state’s residents and remit the tax to that state. BATSA, in contrast, is focusing on direct tax on businesses,” he said.

 

“Unfortunately, some state revenue departments and state legislatures have been creating barriers to interstate commerce by aggressively attempting to impose direct taxes on out-of-state businesses that have little or no connection with their state,” he told the committee. “Specifically, some state revenue departments have asserted that they can tax a business based merely on its economic presence in the state—based on the recently-minted notion of ‘economic nexus.’ The economic nexus concept flies in the face of the underlying basis of business activity taxation, which is that a business should be subject to tax only by those states from which the business receives meaningful benefits and protections.”

 

“The underlying principle of the BATSA legislation is that only states and localities that provide meaningful benefits and protections to a business—like education, roads, fire and police protection, water, sewers, etc. —should be the ones who receive the benefit of the business’ taxes, rather than a remote state that provides no services to the business,” he added. “Further, businesses should only pay tax to those states and localities where they earn their income, and income is only earned where a business is actually located.”

“A physical presence nexus standard provides a clear test that is consistent with the principles of current law and sound tax policy and that is consistent with Public Law 86-272, a time-tested and valid congressional policy,” he said.

 

“At this time, there is no indication that the business activity tax nexus issue will be settled absent congressional action.” Rosen said. “BATSA will not cause any meaningful dislocations in any state’s revenue sources and will not encourage mass tax-sheltering activities. Instead, its enactment will ensure that the U.S. business community, and thus the American economy, are not unduly burdened by unfair attempts at taxation without representation.”

 

 

Supreme Court Upholds ACA Subsidies

BY ROGER RUSSELL

 

The Supreme Court, in a 6-3 decision, has upheld the tax subsidies under the Patient Protection and Affordable Care Act.

 

The challenge by opponents of Obamacare grew out of the phrase “established by the state,” which referred to the exchanges, or marketplaces, where people could compare and purchase insurance plans. Each state can establish its own Exchange, but the ACA also provides that the federal government will establish an exchange if the state does not.

 

Under the ACA, tax credits “shall be allowed” for any applicable taxpayer, but only if the taxpayer has enrolled in an insurance plan through “an Exchange established by the State.” An IRS regulation interprets this as making the credits available on an exchange “regardless of whether the Exchange is established and operated by a State…or by [Health and Human Services].”

 

According to the petitioners in the case, known as King v. Burwell, Virginia’s federal exchange does not qualify as an exchange “established by the State” so they should not receive any tax credits. That would make the cost of buying insurance more than eight percent of their income, exempting them from the act’s coverage requirement. As a result of the IRS regulation, however, they would receive tax credits, making the cost of buying insurance less than 8 percent of their income, rendering them subject to the coverage requirement.

 

The specific holding of the court is that Section 36B’s tax credits are available to individuals in states that have a federal exchange.

 

Chief Justice John Roberts delivered the majority opinion, and was joined by Justices Anthony Kennedy, Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan. Justice Antonin Scalia filed a dissenting opinion, in which Justices Clarence Thomas and Samuel Alito joined.

The phrase “an Exchange established by the State under [42 U.S.C. section 18031]” is properly viewed as ambiguous, according to Roberts.

 

The phrase may be limited in its reach to state exchanges, Roberts noted. “But it is also possible that the Act refers to all Exchanges—both State and Federal – for purposes of the tax credits. If a State chooses not to follow the directive in Section 18031 to establish an Exchange, the Act tells the Secretary of Health and Human Services to establish ‘such Exchange.’ And by using the words ‘such Exchange,’ the Act indicates that State and Federal Exchanges should be the same,” he stated.

 

“But State and Federal Exchanges would differ in a fundamental way if tax credits were available only on State Exchanges—one type of Exchange would help make insurance more affordable by providing billions of dollars to the States’ citizens, the other type of Exchange would not.”

 

Roberts pointed out provisions in the ACA that would not make sense unless tax credits were available on both the state and federal exchanges. Looking to the broader structure of the Act, he concluded that “the statutory scheme compels the Court to reject petitioners’ interpretation because it would destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very ‘death spirals’ that Congress designed the Act to avoid.”

 

Reactions from Tax Experts
 

Tax experts weighed in on the Supreme Court’s ruling. “The status quo has been preserved.” said Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting US. “The stock market seems to be rewarding the health insurance companies that might have lost out on subsidies. By and large, people can keep doing what they were doing—this is the way the IRS has been interpreting the law, so in that sense, nothing will change.”

 

Republicans are saying they will continue their attempts to repeal or further curtail Obamacare, Luscombe noted.  “One of the techniques being looked at will be to tie it in to reconciliation, which only needs a majority vote in the Senate,” he said. “This would avoid the necessity of finding 60 votes in the Senate, and it’s how Obamacare got passed in the first place. It was included as part of a reconciliation measure in 2010 and so avoided that issue. Of course, if they tried to overcome a veto then they would need some Democratic support.”

 

“King V. Burwell upholds the validity of tax credits for individuals living in states that use the federal exchange, HealthCare.gov,” said Bloomberg BNA state tax law editor Annabelle Gibson. “That means individuals who purchase insurance through HealthCare.gov that are eligible for credits will continue to receive them to help pay for their health insurance.” 

 

“The court focused on determining Congress’ intent when enacting the ACA when determining whether the words ‘Exchange established by the State’ include federal and state run exchanges,” she said.

 

“The court wrote that allowing credits for insurance purchased on any exchange will avoid the ‘calamitous result that Congress plainly meant to avoid’ when enacting the ACA, as the ACA was meant to increase access to health care throughout the United States,” Gibson remarked.

 

Applicable large employers who are subject to the employer mandate will continue to be liable for penalties for failing to offer minimum essential insurance coverage to their employees and their dependents, if employees purchase health insurance through any exchange and receive a tax credit, according to Gibson.

 

“If the tax credits had been struck down, employers in states using the federal exchange would not have been liable for a penalty even if an employee had purchased insurance through a federal exchange, because under the strict wording of the ACA, the penalty only applies if an employee received a tax credit to pay for their insurance,” she said. “Because the subsidies have been upheld, the employer mandate remains in place for all applicable large employers.”

 

Individuals in all states remain subject the individual mandate under the ACA, she indicated.

 

“If subsidies had been struck down, then the cost of health care would have gone up for many people and it was possible that the cost of purchasing health care could have been greater than eight percent of those individual’s income, exempting them from the ACA’s coverage requirement,” she said. “That type of situation could have pushed insurance marketplaces into a ‘death spiral.’”

 

“However, because the subsidies remain intact, people can continue to use them to help pay for their health insurance, likely bringing the cost of their insurance under the 8 percent level,” said Gibson. “That means that the individual mandate would still apply if someone didn’t purchase health insurance.”

 

 

 

Serious Implications from the Supreme Court's ACA Decision

BY ROGER RUSSELL

 

The King v Burwell decision by the Supreme Court, while leaving the status quo unchanged, nevertheless has elicited statements ranging from seasoned analysis to partisan diatribes on both sides of the issue that was litigated.

 

The issue itself was simple: to determine whether the statute’s wording that allows tax credits to an applicable taxpayer who enrolls in an insurance plan through “an Exchange established by the State” necessarily precludes a subsidy for those enrolled in an insurance plan procured through a Federal Exchange and not one established by the state.

 

For the plaintiffs/petitioners, the implications were that if they failed to receive tax credits it would make the cost of buying the insurance more than 8 percent of their income, thus exempting them from coverage requirements.

 

The decision will have a significant impact on the accounting world, according to Michael Greenwald, partner and corporate & business tax practice leader at Friedman LLP.

 

“If there were companies that were on the verge of not offering insurance, and sending their employees to the exchanges and paying the penalty, now they don’t have to worry about the exchanges not being there,” he said. “The bigger question was whether the law would be in place at all. The message is that the law will be in place for a while.”

 

“What that means most immediately is that there are some significant reporting requirements that start in 2015,” he added. “They phase in this year for employers with 100 plus employees. It involves reporting both to your employees and to the government, and requires a lot of information from different places in the company.”

 

“The reporting requirements apply not just to for-profit companies, but to a whole host of organizations,” observed Greenwald. “And it’s not something you can get started on in December. A lot of employers will wake up at the end of the year and wonder how they will meet these requirements.”

 

President Obama celebrated the decision: ”Today, after more than 50 votes in Congress to repeal or weaken this law; after a presidential election based in part on preserving or repealing this law; after multiple challenges to this law before the Supreme Court—the Affordable Care Act is here to stay.” 

 

“This morning, the Court upheld a critical part of this law—the part that’s made it easier for Americans to afford health insurance regardless of where you live,” he said. “If the partisan challenge to this law had succeeded, millions of Americans would have had thousands of dollars’ worth of tax credits taken from them. For many, insurance would have become unaffordable again. Many would have become uninsured again. Ultimately, everyone’s premiums could have gone up. America would have gone backwards. And that’s not what we do. That’s not what America does. We move forward.”

 

Senate Finance Committee ranking member Ron Wyden, D-Ore., likewise welcomed the decision. “Today, the Supreme Court has reached the same conclusion that has been so clear, to so many, for so long. Congress intended tax credits for all who qualified, no matter their zip code,” Wyden said. “I applaud the Court for reading the law correctly. This ruling should once and for all put to rest challenges to the Affordable Care Act.”

 

Republican Sen. Chuck Grassley of Iowa, a former chairman of the Senate Finance Committee, commented: “I respect the court and its role in our system of government, but Obamacare remains a terrible law. It’s led to too many people losing the coverage they had and spending more for what coverage they can get. Iowans tell me directly in town meetings and in emails and letters to my office that they don’t like the law.  Obamacare upended the whole health system instead of targeting what was wrong and fixing those problems.  Now the debate returns to the Congress and next year’s presidential election. I’m committed to replacing Obamacare with health care reforms that empower consumers, drive down costs, and use marketplace incentives to make health care coverage accessible and affordable. The current majority in Congress is committed to repealing Obamacare and replacing it with effective reforms driven by the marketplace, not the heavy hand of government.”

 

Merrill Matthews, resident scholar at the Institute for Policy Innovation, had a different take on the decision. “If Obamacare fails, it’s best that the American people drive that change through their elected representatives, not a panel of nine justices,” he said. “Having the Supreme Court be the one to single-handedly undermine the president’s health care law was never the best approach; it would have further politically charged the issue and liberals would have pinned the blame solely on the Court if the law foundered.”

 

 

 

Affordable Care Act and Employers: Understanding Affordable and Minimum Value Coverage

 

In general, under the employer shared responsibility provisions of the Affordable Care Act, an applicable large employer may either offer affordable minimum essential coverage that provides minimum value to its full-time employees and their dependents or potentially owe an employer shared responsibility payment to the IRS. 

 

Here are definitions to help you understand affordable coverage and minimum value coverage.

 

Affordable coverage: If the lowest cost self-only only health plan is 9.5 percent or less of your full-time employee’s household income then the coverage is considered affordable. Because you likely will not know your employee’s household income, for purposes of the employer shared responsibility provisions, you can determine whether you offered affordable coverage under various safe harbors based on information available to the employer.

 

Minimum value coverage: An employer-sponsored plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan.

 

Under existing guidance, employers generally must use a minimum value calculator developed by HHS to determine if a plan with standard features provides minimum value. Plans with nonstandard features are required to obtain an actuarial certification for the nonstandard features. The guidance also describes certain safe harbor plan designs that will satisfy minimum value.

 

For more information, visit the Affordable Care Act Tax Provisions for Employers pages on IRS.gov/aca.

 

 

 

IRS Awarded $188M in Contracts to Companies with Tax Debts

BY MICHAEL COHN

 

The Internal Revenue Service awarded $18.8 million in contracts to 17 corporations with federal tax debt during fiscal years 2012 and 2013 despite a legal prohibition from doing business with corporations that owe back taxes, according to a new government report.

 

The report, publicly released Wednesday by the Treasury Inspector General for Tax Administration, pointed out that beginning in fiscal year 2012, federal law has prohibited the IRS from using appropriated funds to enter into a contract with a corporation that has certain federal tax debt and/or felony convictions, unless a Department of the Treasury Suspension and Debarment official has considered suspending or debarring the corporation.

 

TIGTA reviewed whether the IRS had well-designed and effective management controls in place over the use of appropriated funds in fiscal years 2012 and 2013 to implement the requirements of the federal law that prohibited the award of contracts to corporations with certain Federal tax liabilities. The Consolidated Appropriations Act of 2012 also prohibited the IRS from using its appropriated funds to enter into a contract with any corporation that was convicted or had an officer or agent of such corporation acting on behalf of the corporation convicted of a felony criminal violation under any federal law within the preceding 24 months.

 

TIGTA found that the IRS did not have effective controls in place to prevent the award of contracts to corporations with certain federal tax debt and/or felony convictions. Inspectors identified 17 corporations that were awarded a total of 57 contracts valued at about $18.8 million during FYs 2012 and 2013, while the corporations had federal tax debt.

 

In addition, TIGTA found that the IRS did not follow the Treasury Department requirement to insert specific language in solicitations requiring corporations to assert whether or not they have certain federal tax debt and/or felony convictions. Based on a statistical sample of contracts awarded in FY 2012 and 2013, TIGTA found that the IRS did not require corporations to self-certify prior to contract award, as required, for any of the 143 sample cases.

 

TIGTA recommended that the IRS update its current procurement policies and procedures to reflect Treasury Department requirements and ensure that contractor self-certifications are obtained and reviewed prior to awarding contracts.  TIGTA also recommended that the IRS develop procedures to determine what constitutes federal tax debt, as defined by the Consolidated Appropriations Act of 2012, for the purpose of conducting tax checks to comply with this federal law.

 

In response to the report, IRS management agreed with two of our recommendations and partially agreed with two other recommendations. The IRS plans to conduct training for its contracting officials and monitor contracting actions for compliance with Treasury policy. However, the IRS asserted it was appropriate to award nearly $18 million of contract modifications to contractors with federal tax debt.

 

“We are committed to ensuring that the IRS complies with all regulatory guidance and take this matter seriously,” wrote Kevin Q. McIver, acting chief of agency-wide services at the IRS, in response to the report.

He pointed out that the TIGTA report acknowledged that 32 of the 57 contracts were modifications to existing contracts with a total value of approximately $18 million.

 

“By including the 32 modifications within TIGTA’s calculation, we feel TIGTA improperly interpreted the 2012 and 2013 policies on this matter,” wrote McIver. “The policies were clear in that they only applied to new solicitations. A proper analysis shows the identification of 25 new awards valued at less than $900,000.”

 

TIGTA said it disagreed with this assertion. The contract modifications were related to contracts awarded before the new requirements of the federal law became effective. However, all 32 modifications were awarded after the law was enacted and the nearly $18 million to fund the new work related to these modifications was obligated after the new law became effective. Therefore, TIGTA believes the IRS was prohibited from using appropriated funds to make these awards per the Treasury’s implementing guidance.

 

An IRS spokesperson emailed a further comment on the report to Accounting Today on Wednesday. “The IRS remains deeply concerned about awarding contracts to delinquent corporations,” said the IRS statement. “We have taken a number of corrective steps to make improvements in this area, and we will continue to do more. It is important to note that nine contractors—more than half of the 17 contractors cited in the TIGTA report—are now compliant with their taxes, with one of those in an installment payment agreement. To put this into perspective, the IRS awarded more than 20,000 contracts worth billions of dollars in fiscal years 2012 and 2013. That means the 57 contracts identified in the report represent a small fraction of overall IRS contracting work—well under a half percent of the total awarded. The IRS remains committed that everyone, including contractors, stays in compliance with the tax law and pays their fair share of taxes. Going forward, the IRS will continue focusing on this area and applying appropriate checks and protections to ensure companies receiving awards meet their tax obligations.”

 

 

 

Rand Paul Said to Take on the IRS, Again

BY RICHARD RUBIN

 

The Kentucky senator is expected to be one of the plaintiffs in a lawsuit against the Internal Revenue Service and the Treasury Department, challenging the government's rules on how Americans abroad are taxed and what foreign banks have to disclose about U.S. citizens who are their customers. Being on the wrong side of the IRS is, of course, a great place for a Republican presidential contender to be.

 

The focus of the lawsuit is the 2010 Foreign Account Tax Compliance Act—FATCA to the initiated—which has made it much harder for Americans to have foreign bank accounts hidden from the IRS. It's also been a logistical nightmare for the millions of Americans who live outside the country and are still required to file U.S. taxes. The law has also prompted some foreign banks to refuse U.S. customers rather than deal with the hassles.

 

The Washington Times first reported Paul's involvement in the suit on Thursday. Solomon Yue, vice chairman of Republicans Overseas, and James Bopp, the lead lawyer on the suit, both said Paul will be one of the plaintiffs, which will be filed in federal court in southern Ohio. Sergio Gor, a Paul spokesman, wouldn't confirm the Kentucky senator's involvement.

 

Paul's portion of the suit will question the administration's ability to negotiate agreements with other countries for sharing tax data without going through the formal treaty process that requires Senate approval. To implement FATCA, the Treasury Department has signed cross-border agreements that are easier for governments and banks to use than the strict rules in the law itself.

 

“The president can only rely upon his authority and he has no authority in the Constitution for this,” Bopp said in an interview on Thursday.

 

Labeling those intergovernmental agreements as treaties would let Paul block them—something he's not shy about doing. He's already halting a deal with Switzerland that was signed in 2009, and Treasury Department officials have complained that other countries have become less willing to negotiate tax treaties with the U.S. because they have little confidence that the Senate will ever ratify them.

 

Bopp, a longtime conservative activist, said the other plaintiffs are Americans who live abroad and they'll be challenging  other portions of FATCA and related bank-disclosure requirements. It could be a tough case. Courts—remember the Supreme Court's Obamacare ruling in 2012—are typically very deferential to the government's authority to tax. Bopp said the problem is the requirement to disclose confidential information without a warrant.

 

“We don't think this has to do with taxes,” Bopp said. “This has to do with disclosing private, personal information. The existence of a bank account in a foreign country has nothing to do with what taxes are imposed.”

 

 

 

Last-Minute Reminder: Report Certain Foreign Bank and Financial Accounts to Treasury by June 30

 

The Internal Revenue Service today reminded everyone who has one or more bank or financial accounts located outside the United States, or signature authority over such accounts that they may need to file an FBAR by next Tuesday, June 30.

 

FBAR refers to Form 114, Report of Foreign Bank and Financial Accounts, which must be filed with the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department. It is not a tax form and cannot be filed with the IRS. The form must be filed electronically and is only available online through the BSA E-Filing System website.

 

In general, the filing requirement applies to anyone who had an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2014. Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them.

 

FBAR filings have surged in recent years, topping the one-million mark for the first time during calendar-year 2014. The FBAR requirement is separate from the requirement to report specified foreign financial assets on a U.S. income tax return using Form 8938. A brief comparison of the two filing requirements is available on IRS.gov.

 

 

 

 

CPAs See Increase in Financial Fraud against Elderly

BY MICHAEL COHN

 

Financial fraud perpetrated against the elderly is on the rise, according to a new survey of CPA financial planners.

 

The poll, released Tuesday by the American Institute of CPAs, found that 47 percent of CPA financial planners have seen an increase in elder fraud or abuse in the past five years. The AICPA surveyed 266 CPAs from May 5 to 27 for its AICPA PFP Trends Survey.

 

The survey found that falling victim to fraud was vastly more likely to have a substantial emotional impact (37 percent) than a substantial financial impact (5 percent). A contributing factor to the emotional impact of financial fraud or abuse is how often the situation involves family members. The most common types of elder financial abuse or fraud seen by CPA financial planners over the past five years were phone or Internet scams (79 percent), the inability to say no to relatives (72 percent) and support for non-disabled adult children (57 percent).

 

 “For elderly individuals, being a victim of financial fraud or abuse can be emotionally devastating. The impact is compounded when the perpetrator is a member of their own family or a friend,” said Ted Sarenski, a member of the AICPA’s PFP Conference Planning Committee, in a statement. “One of the unique challenges for CPA financial planners working with elderly clients is balancing their desire to help their family members financially with the need to ensure that they have the means to continue to meet their own expenses.”

 

The survey found that family members are often involved in elder planning meetings, with spouses taking part 77 percent of the time, and adult children 37 percent of the time. Others involved in the process as part of an elder client’s “support team” are attorneys (39 percent of the time), trustees (23 percent) and outside investment managers (19 percent), underscoring the role of the CPA financial planner in coordinating with others.

 

“In elder care and planning issues, particularly those that involve dementia, the CPA financial planner serves as the quarterback – calling the plays and making sure that everyone involved is playing the role that they are supposed to,” said Jean-Luc Bourdon, another member of the AICPA’s PFP Executive Committee. “Whether it is decisions regarding estate planning, long term care or housing, it’s crucial that CPA financial planners coordinate with other professionals employed by their elderly clients.”

 

One of the most emotional aspects of elder care planning involves decisions about housing, including helping elderly clients make the decision to relocate into a continuing care facility. The survey found that CPA financial planners had assisted 15 percent of their elderly clients with decisions relating to housing options or nursing home due diligence analysis in the last year.

 

Forty-four percent of respondents reported that they’re providing this service for their elderly clients more frequently than they were five years ago. With the U.S. population continuing to age, it is likely that this trend will continue moving forward, the AICPA noted.

 

Providing elder planning services requires an approach that combines sophisticated technical expertise with the emotional intelligence to understand a client’s needs. CPA financial planners suggest a number of strategies for safeguarding their elderly clients from financial fraud and abuse and helping to ensure that their assets are protected in their golden years, including:

 

• Establish a financial plan and review the plan every six months to make sure there are enough assets to match the plan, or if any adjustments need to be made due to changes in care or needs.

 

• Identify the members of the client’s support team. Include professionals, designees—such as those designated to make medical decisions—and loved ones.  Team members should know and be formally authorized to communicate with one another. This helps provide checks and balances, and, since elder financial abuse is often committed by a relative, checks and balances are important.

 

• Tell clients to use their CPA financial planner as “the bad guy.” Get them in the habit of saying “I run everything by my CPA financial planner; I'll get back to you” before making financial commitments to others. That way they will not be caught off guard by scams or stories aimed to take advantage of them.

 

• If a client is displaying competency issues or just can't say no to relatives, put their assets in a Revocable Living Trust and assign a co-trustee. Ensure that all checks—or checks over a certain dollar amount—require two signatures. This can reduce any chance of an elderly client giving to unscrupulous people.

 

 

 

Brothel Owner Protests Austrian Taxes

By Michael Cohn 

 

The owner of a brothel in Salzburg, Austria has found an innovative way to protest what he sees as punitive taxation and regulation of his industry: offering free sex and drinks to patrons all summer.

 

One of Hermann Mueller’s brothels, Pascha, posted an ad on its Web site claiming, “We are not paying taxes any more. Effective immediately: Free Entrance! Free Drinks! Free Sex!”

 

Mueller told the Austrian newspaper Oesterreich that he would compensate the prostitutes working at his business up to 10,000 euros a month (or about $11,270) for the payments they would otherwise receive from customers, according to Reuters.

 

Mueller owns brothels in four other cities in Austria and Germany and complains he has to pay millions of euros in taxes.

 

 

 

Wal-Mart Has $76 Billion in Overseas Tax Havens, Report Says

BY JESSE DRUCKER AND RENEE DUDLEY

Wal-Mart Stores Inc. owns more than $76 billion of assets through a web of units in offshore tax havens around the world, though you wouldn’t know it from reading the giant retailer’s annual report.

 

A new study has found Wal-Mart has at least 78 offshore subsidiaries and branches, more than 30 created since 2009 and none mentioned in U.S. securities filings. Overseas operations have helped the company cut more than $3.5 billion off its income tax bills in the past six years, its annual reports show.

 

The study, researched by the United Food & Commercial Workers International Union and published Wednesday in a report by Americans for Tax Fairness, found 90 percent of Wal-Mart’s overseas assets are owned by subsidiaries in Luxembourg and the Netherlands, two of the most popular corporate tax havens.

 

Units in Luxembourg—where the company has no stores—reported $1.3 billion in profits between 2010 and 2013 and paid tax at a rate of less than 1 percent, according to the report.

 

All of Wal-Mart’s roughly 3,500 stores in China, Central America, the U.K., Brazil, Japan, South Africa and Chile appear to be owned through units in tax havens such as the British Virgin Islands, Curacao and Luxembourg, according to the report from the advocacy group. The union conducted its research using publicly available documents filed in various countries by Wal- Mart and its subsidiaries.

 

Randy Hargrove, a Wal-Mart spokesman, called the report incomplete and “designed to mislead” by its union authors. He said the company has “processes in place to comply with applicable SEC and IRS rules, as well as the tax laws of each country where we operate.”

 

Mailbox Subsidiaries
 

The union behind the study backs the Organization United for Respect at Wal-Mart, a group that campaigns for wage increases and more predictable schedules. Wal-Mart has historically resisted unions and discourages employees from joining them.

 

The report comes a week after the Group of Twenty nations unveiled its latest effort to combat multinational corporate tax avoidance. The body wants companies to disclose to regulators where they book profits, employees and sales, so tax authorities can be aware of discrepancies between where corporations report income and where they have operations.

 

Hargrove, the Wal-Mart spokesman, pointed to guidance issued by the SEC that permits companies to avoid disclosure of subsidiaries with significant “intercompany transactions.” He said Wal-Mart’s tax savings overseas was driven by lower rates in markets including Canada and the U.K.

 

‘Continuing Evidence’
 

Companies such as Google Inc., Apple Inc. and Starbucks Corp. have come under fire for avoiding billions of dollars of income taxes by attributing profits to mailbox subsidiaries in low-tax jurisdictions like Bermuda. The Group of Twenty has directed the Organization for Economic Cooperation and Development to develop plans to crack down on such strategies.

 

The new Wal-Mart disclosures could expand the scope of international tax reform, which has often focused on technology companies that move profits offshore by assigning valuable patent rights to mailbox units. Bloomberg News reported last year that Inditex SA, the parent of Zara, the world’s biggest fashion retailer, cut its taxes by shifting billions of dollars of profits to a tiny Dutch unit.

 

“This report is continuing evidence that everybody has been engaging in cross-border tax avoidance,” said Stephen E. Shay, a professor at Harvard Law School and former deputy assistant secretary for international tax affairs for the Obama Treasury Department.

 

Hybrid-Loan Strategy
 

Nearly a decade ago, Wal-Mart ran into trouble over strategies to avoid U.S. state income taxes. It used a real estate investment trust to effectively pay rent to itself, generating big tax deductions, even though the rent payments never left the company. At least six states changed their tax laws after publicity about the tactics.

 

Since then, Wal-Mart has stepped up its use of offshore tax havens. It has created 20 new subsidiaries in Luxembourg alone since 2009, according to the report.

 

Wal-Mart employs a popular legal strategy in that country called a hybrid loan. It permits companies’ offshore units to take tax deductions for interest paid—typically on paper only—to their parents in the U.S. The parent, however, doesn’t include that interest as taxable income in the U.S.

 

The OECD has called for an end to the tax benefits of such loans. Luxembourg generated headlines last year after the International Consortium of Investigative Journalists revealed its role in cutting the tax bills of hundreds of multinationals.

 

Union Funding
 

U.S. companies owe tax at a rate of 35 percent but can defer indefinitely the income taxes on profits attributed to overseas units. In 2011, Wal-Mart’s then-chief executive officer, Mike Duke, called in testimony before Congress for a system that would exempt from U.S. income tax the earnings that multinationals generate overseas.

 

Wal-Mart’s accumulated offshore earnings have doubled to $23.3 billion in 2015 from $10.7 billion 2008.

 

The company operates about 6,300 stores in 27 countries outside the U.S. and last fiscal year reported 28 percent of its sales abroad, or about $137 billion.

 

Wal-Mart paid $6.2 billion in U.S. income tax last year, Hargrove, the company spokesman, said, or “nearly 2 percent of all corporate income tax collected by the U.S. Treasury.”

 

Americans for Tax Fairness called on the European Union to open investigations into whether the Luxembourg tax benefits constitute illegal state aid. The EU has issued preliminary findings that this was indeed the case with companies using similar strategies in various countries, including as Starbucks in the Netherlands, Apple in Ireland and Fiat SpA in Luxembourg.

 

The tax group receives most of its funding from foundations, including the Ford Foundation, Open Society Foundations, Bauman Foundations and Stoneman Family Foundation. It’s also funded by public-sector unions, including the American Federation of State, County and Municipal Employees and the National Education Association.

 

 

 

Proposed Regulations Offer Guidelines for New State-Sponsored ABLE Accounts for People with Disabilities

 

The Internal Revenue Service today released proposed regulations implementing a new federal law authorizing states to offer specially-designed tax-favored ABLE accounts to people with disabilities who became disabled before age 26.

 

The Achieving a Better Life Experience (ABLE) account provision was signed into law in December 2014. Recognizing the special financial burdens faced by families raising children with disabilities, ABLE accounts are designed to enable people with disabilities and their families to save for and pay for disability-related expenses.

 

The new law authorizes any state to offer its residents the option of setting up an ABLE account. Alternatively, a state may contract with another state that offers such accounts. The account owner and designated beneficiary of the account is the disabled individual. In general, a designated beneficiary can have only one ABLE account at a time, and must have been disabled before his or her 26th birthday. The law provides what it means to be disabled for this purpose.

 

Contributions in a total amount up to the annual gift tax exclusion amount, currently $14,000, can be made to an ABLE account on an annual basis, and distributions are tax-free if used to pay qualified disability expenses.

 

These are expenses that relate to the designated beneficiary’s blindness or disability and help that person maintain or improve health, independence and quality of life. For example, they can include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services and other expenses.

 

In general, an ABLE account is not to be counted in determining the designated beneficiary’s eligibility for many federal means-tested programs, or in determining the amount of any benefit or assistance provided under those programs, although special rules and limits apply for Supplemental Security Income (SSI) purposes.

 

The proposed regulations, available today for public inspection at www.federalregister.gov, provide guidance to state programs, designated beneficiaries and other interested parties on a number of issues. For example, the proposed regulations explain the flexibility the programs have in ensuring an individual’s eligibility for an ABLE account. They also indicate that the IRS will develop two new forms that ABLE account programs will use to report relevant account information annually to designated beneficiaries and the IRS — Form 1099-QA for distributions and Form 5498-QA for contributions.

 

Until the issuance of final regulations, taxpayers and qualified ABLE programs may rely on these proposed regulations.

 

The IRS welcomes comments. Comments must be received by Sept. 21, 2015, and may be submitted electronically, by mail, or hand delivered to the IRS. A public hearing is scheduled for Oct. 14, 2015, at the IRS Auditorium, 1111 Constitution Ave. NW, in Washington. See the proposed regulations for details on submitting comments or participating in the public hearing. More information can be found at Tax Benefit for Disability: IRC Section 529A.

 

 

 

The Wild West of Data Privacy and the Cloud

BY CHRISTOPHER STARK

 

The first time the country was connected coast-to-coast, it was with the wood and steel of railroad tracks into the Wild West that redefined the frontier, and the nation. Today, we use fiber-optic cable to join the frontiers of the information superhighway, which are accessed increasingly via the cloud.

 

Regulatory standards and laws are necessary to handle any new path of business. For the railroad system, federally mandated laws introduced structure to the industry. In the 21st century, we are once again ill-prepared to handle the altered landscape of technological advancements due to a lack of regulatory laws for data privacy.

 

The cloud has reshaped the business world, giving businesses and workers the luxury of accessing and integrating the tools and data necessary to complete their workday. We enjoy the uninterrupted ability to innovate, create, access, store, and share information anytime, anywhere. Though the cloud is safe and secure, serious questions persist regarding privacy and responsibility. Information is traveling too fast, across too many “borders” to continue our present regulatory course. The situation is eerily similar to the days of the Wild West with ad hoc laws and speculative regulation.

 

Each of these advancements brought the country closer together—one by quickly moving goods and services across state borders, while the other moves data across physical and virtual borders instantaneously. The railroad system operated largely free from regulation, with only a patchwork of disparate rules, likely created by individual entities. This caused tremendous confusion and frustration as companies and individuals tried to navigate the evolving landscape. At present in the United States, individual companies, states and industry organizations have created their own rules and guidelines for implementing cloud environments, but nothing is standardized federally.

 

How businesses choose to approach data privacy varies. Most companies tend to adhere to the laws and regulations of the state in which they are headquartered. The American Bar Association notes, however, that each state has a law related to data privacy and confidentiality that is worded and interpreted differently. This has a complicated impact on the cloud.

 

Cloud service providers routinely spread data across several data centers and fiber-optic lines nationwide. Those centers and lines of transmission route data to its destination, protecting users and their privacy, and companies’ abilities to provide uninterrupted access to data, regardless of their physical location. In the event an issue occurs, a myriad of legal and regulatory questions arise. Who has control of the data? Where is it stored? Who can get to it? When this happens, we find ourselves facing ambiguity while grasping for answers.

 

Absent guidelines, companies are frequently lost to the whim of whomever handled the data last, who has the tightest liability shield, or with whom the data originated. All options could be applicable just as easily as none could be.

 

Some industries have attempted to establish their own regulations for data privacy that add to state law, while others have gravitated toward adopting regulations for their own purposes under the assumption they must be comprehensive. Accountants with SOC 2, healthcare and HIPPA, etc., are all admirable attempts at regulating who has access to data, and each contributes to the confusion, especially when data is handled through a service provider. The primary hesitation companies experience when it comes to confidentiality is determining who is in control of sensitive data and where the assumptions of protection and liability stand.

 

Some may assume that the data is held on the cloud provider’s server so the cloud computing provider is liable. Cloud providers take proactive measures to ensure private data will not be exposed, but ultimately the data belongs to their client and the cloud provider cannot control who accesses the data from the client side. Many cloud computing providers offer a master service level agreement (MSLA) that clarifies this relationship, but it is only a piece of the regulatory mosaic.

 

A line must be drawn somewhere. Like the railroad industry before it, the cloud needs federal regulations to tie the law and the country together. The Wild West nature of varied local laws is chaotic for both sides. As a result, CPA firms lack the means to fully compare cloud providers to one another on security, privacy and best practices.

 

The time for us to enact regulations and privacy laws on the information superhighway was years ago, yet we still operate under rules established during the dial-up days. Until federally mandated regulations are in place, there will continue to be a unique set of rules that are specific to particular states and industries. This leaves everyone wondering which regulations apply to them. Adopting a wait-and-see attitude of which one prevails leaves a mismatch of misfit regulations. The issue is too important to merely hope for the best. There should be—must be—federally mandated regulations.

 

Christopher Stark is president and CEO of Cetrom Information Technology.

 

 

 

 

 

Living with Lodging Taxes

BY ROGER RUSSELL

 

When taxpayers rent out a room on Airbnb, they may realize that any compensation they receive is subject to income tax. Lodging tax, however, is probably not on their minds.

 

What is lodging tax and how does it differ from income tax? Those are questions that everyone that lists on a VRBO (vacation rental by owner) type of business should be asking, but most aren’t, according to Rob Stephens, CPA. 

 

“This is an area that CPAs need to explain to their clients,” he said. “But in our experience, the rank and file CPA is not well versed in these industry-specific taxes.”

 

 “Lodging tax is the same tax a hotel pays and it is charged for each night’s stay,” he explained. “Short-term rental owners must pay the same tax. Renters should be charged the tax, just like in a hotel, and those who list need to collect and pay this tax. Not only is the tax legally due to the state and local agencies, there is also registration and licensing paperwork that is necessary to fill out before a home is rented.”

 

To make the issue more complicated, each state has different compliance rules, Stephens indicated. “Some state taxes are supposed to be paid quarterly, while some are due on a monthly basis. As short-term rentals continue to grow in popularity, so do the unpaid taxes due to each state. And tax agencies are starting to crack down and come after those who aren’t paying.”

 

Stephens, a short-term rental owner himself, realized the complexity of the market and co-founded MyLodgeTax, an Avalara product, to help home owners renting out their residences quickly and painlessly deal with this tax issue. The product is geared both to CPAs and to individual clients.

 

“As the marketplace grows, consumers will benefit from knowing that when they stay at a rental, a tax is owed, and for those that are listing their homes, they need to know it should be charged and paid to the state and local agencies before penalties and back taxes are due,” he said.

 

“We sell to people who own a second home who use Airbnb, VRBOs and similar websites to rent their home,” said Stephens. “We charge $10 to $12 a month for all filings. The accountant may recommend us to the client, or they may use our platform so that we do the filings, and they bill the client. Our customers can report to us online their total rent for the month. Once they click ‘submit,’ we calculate everything, file and pay the taxes electronically.”

 

MyLodgeTax’s business model is based on leveraging technology and scale, Stephens said. “For example, we’re integrated directly into the Florida Department of Revenue. We push a button and transmit data for 2,000 accounts along with payments. It took a lot of software development and integration, but once it was built it’s very scalable.”

 

Lodging is taxed in every state, although different states have different names for it, Stephens observed. “Half or more of what we pay is sales tax, with a lodging or hotel tax layered on top of it. In most states, it’s sales plus occupancy, while some states have a different tax specifically for lodging. Then there are states like Oregon which don’t have a sales tax but have a Room Occupancy or lodging tax.”

 

The degree of noncompliance varies according to segment within the industry, according to Stephens.

 

“There’s the property management side, where professionals manage your property—that’s highly compliant,” he said. “The rent by owner segment is somewhere in the middle. Those are people who have made a significant investment and own a second home and rent it out to help cover expenses.  The Airbnb segment is likely to be highly noncompliant, not because they’re tax cheats but because they just didn’t know they had the obligation. These are people usually renting their primary residences who will stay with a friend and rent out their apartment for a weekend, or rent while they are traveling.”

 

 

 

Carly Fiorina Shows Us Just How Weird America’s Tax System Is

Josh Barro

 

Last week, Carly Fiorina’s presidential campaign made an offer to reporters that was tantalizing to me, but probably to few other people on the planet: If we came in person to her campaign headquarters in Virginia, we could review her state income tax returns.

 

Ms. Fiorina had already put her and her husband’s federal income taxes for 2012 and 2013 online, along with a disclosure of financial assets that is much more detailed than required by law. (Ms. Fiorina, a former chief executive of Hewlett-Packard, and her husband have a net worth of precisely $58,954,494.88, according to her disclosure forms.) But I was mostly interested in the Fiorinas’ state income tax returns because they demonstrate a distinct — and distinctly annoying — feature of American taxes: the way states clamber over one another, trying to tax the same income, often generating a lot of paperwork but not much revenue.

 

Mr. and Ms. Fiorina had to file taxes in no fewer than 17 states in 2013, many of them with only the most tenuous connection to the Fiorinas or their financial interests. In 11 of those states, their tax bill was less than $250.

 

Of course, the Fiorinas make more money than most people, about $2.5 million in 2013, which is a major reason they were taxed in so many states. But the tax rules that cause the Fiorinas to have around a 1,000-page stack of state income tax returns also hit many Americans with more moderate incomes, requiring them to file multiple state income tax returns.

 

In the Fiorinas’ case, consider Michigan. The Fiorinas do not live or work in Michigan. They do not own a business or income-producing real estate there. Ms. Fiorina did not collect speaking fees from Michigan in 2013. But the Fiorinas do invest in a variety of funds, which generate income in a variety of places, including $946 in 2013 that was attributable to Michigan. So, the Fiorinas had to file a tax return there, which was 58 pages long, and reflects a liability of $40, which they paid.

 

And then they got the money back.

 

The Fiorinas’ home state of Virginia gave them a tax credit of $40, fully offsetting the Michigan tax bill, because Virginia had already taxed the same income Michigan taxed. That’s how the American system of state income taxes generally works: Your home state taxes you on all your income; states where you don’t live tax you on the income you earned in those states; then, because some of your income has been taxed twice, your home state credits you back — but only up to the amount of tax you paid on that income in your home state.

You don’t have to pity the Fiorinas, who presumably did not sweat the cost of getting 17 state income tax returns prepared. But you don’t have to be an ex-C.E.O. to get hit with an interstate tax burden.

 

For example, you could be me. I filed 2014 taxes in two states: New York, where I live and work; and California, where I once appeared on a television show (Fun fact: with Carly Fiorina). I owed $67 to California, and New York gave me back $55 as a credit. So nonresident income taxation cost me $12 in actual taxes, far less than the $40 I paid TurboTax to generate an additional state’s return.

 

The more common reason to end up in this situation is cross-border commuting: If you live in one state and work in another, it’s likely you’re stuck with the obligation to file tax returns in multiple states, with little impact on your actual total tax payment.

 

So why doesn't she advocate rewriting the American constitution and ratifying it. Oh boo hoo. It is a shame the Founders did not put in a...

 

"So nonresident income taxation cost me $12 in actual taxes, far less than the $40 I paid TurboTax to generate an additional state’s return...

 

This is easily fixed. Pay taxes where you live. The high tax states do not want that sort of system. It is the revenge of the high tax blue...

 

There is not much justification for this complex structure, which is why other advanced countries generally do not emulate it. Many other rich countries do not have subnational income taxes at all. Those that do generally have a much simpler rule: You pay income tax where you live.

 

If Carly Fiorina were running for prime minister of Canada, there would have been no similar stack of provincial tax returns for me to page through. In Canada, you pay tax on all your personal income to whatever province you were a resident of on the last day of the year. Business income is only a little more complicated: You pay tax on business income in places where your business has a permanent establishment, not wherever you give a speech or have a consulting client. Switzerland is a country that prizes local government autonomy much as America does, but it also uses the Canadian pay-where-you-live model.

 

Some American states have figured that our system is convoluted and have established bilateral tax agreements to make it less so. Residents of Virginia who earn income in Maryland pay tax just to Virginia, and vice versa. But agreements like these don’t exist everywhere.

Sometimes that’s because there aren’t enough taxpayers to justify negotiating the agreement: The Fiorinas’ situation of living in Virginia and earning in Michigan is probably not very common. Sometimes it’s because the fiscal benefits flow mostly in one direction: A lot more people live in New Jersey and earn income in New York than vice versa, so New York would lose revenue on a deal to simplify taxes for commuters.

 

Because of those parochial interests, tax harmonization tends to happen when it’s enforced from above: Canada’s last-day-of-the-year residency rule is imposed by its federal government. Do not hold your breath for a similar assertion of federal power here.

 

 

 

Get to Know the Health Care Law’s Employer Shared Responsibility Payment

 

Under the Affordable Care Act, applicable large employers – those with 50 or more full-time employees, including full-time equivalent employees – are required to take some new actions. To prepare for 2016, if your organization is an ALE, you need to track information each month in 2015, including:

  • Whether you offered full-time employees and their dependents minimum essential coverage that meets the minimum value requirements and is affordable
  • Whether your employees enrolled in the minimum essential coverage you offered

 

You need to track this information because you could be subject to an employer shared responsibility payment if your organization falls into either of these circumstances:

  • You offered coverage to fewer than 70 percent of your full-time employees and their dependents in 2015 and at least one full-time employee enrolled in coverage through the Health Insurance Marketplace and receives a premium tax credit. The 70 percent threshold is for 2015, after 2015 this increases to 95 percent.
  • You offered coverage to at least 70 percent of your full-time employees and their dependents in 2015, but at least one full-time employee receives a premium tax credit because coverage offered was not affordable, did not provide minimum value or the full-time employee was not offered coverage. After 2015, this threshold increases to 95 percent.

 

For more information about reporting requirements, visit the Employer Shared Responsibility Provisions Questions and Answers page on IRS.gov/aca.

 

 

 

Tax Tips for Students with Summer Jobs

 

Students often get a job in the summer. If it’s your first job it gives you a chance to learn about work and paying tax. The tax you pay supports your home town, your state and our nation. Here are some tips students should know about summer jobs and taxes:

  • Withholding and Estimated Tax.  If you are an employee, your employer withholds tax from your paychecks. If you are self-employed, you may have to pay estimated tax directly to the IRS on set dates during the year. This is how our pay-as-you-go tax system works.
  • New Employees.  When you get a new job, you will need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Employers use it to figure how much federal income tax to withhold from your pay. The IRS Withholding Calculator tool on IRS.gov can help you fill out the form.
  • Self-Employment.  Money you earn doing work for others is taxable. Some work you do may count as self-employment. These can be jobs like baby-sitting or lawn care. Keep good records of your income and expenses related to your work. You may be able to deduct (subtract) those costs from your income on your tax return. A deduction can cut taxes.
  • Tip Income.  All tip income is taxable. Keep a daily log to report them. You must report $20 or more in cash tips in any one month to your employer. And you must report all of your yearly tips on your tax return.
  • Payroll Taxes.  You may earn too little from your summer job to owe income tax. But your employer usually must withhold social security and Medicare taxes from your pay. If you’re self-employed, you may have to pay them yourself. They count for your coverage under the Social Security system.
  • Newspaper Carriers.  Special rules apply to a newspaper carrier or distributor. If you meet certain conditions, you are self-employed. If you do not meet those conditions, and are under age 18, you may be exempt from social security and Medicare taxes.
  • ROTC Pay.  If you’re in ROTC, active duty pay, such as pay you get for summer camp, is taxable. A subsistence allowance you get while in advanced training is not taxable.
  • Use IRS Free File.  You can prepare and e-file your tax return for free using IRS Free File. It is only available on IRS.gov. You may not earn enough money to be required to file a federal tax return. Even if that is true, you may still want to file. For example, if your employer withheld income tax from your pay, you will have to file a return to get a tax refund.

 

 

 

Proposed Regulations Offer Guidelines for New State-Sponsored ABLE Accounts for People with Disabilities

 

The Internal Revenue Service today released proposed regulations implementing a new federal law authorizing states to offer specially-designed tax-favored ABLE accounts to people with disabilities who became disabled before age 26.

 

The Achieving a Better Life Experience (ABLE) account provision was signed into law in December 2014. Recognizing the special financial burdens faced by families raising children with disabilities, ABLE accounts are designed to enable people with disabilities and their families to save for and pay for disability-related expenses.

 

The new law authorizes any state to offer its residents the option of setting up an ABLE account. Alternatively, a state may contract with another state that offers such accounts. The account owner and designated beneficiary of the account is the disabled individual. In general, a designated beneficiary can have only one ABLE account at a time, and must have been disabled before his or her 26th birthday. The law provides what it means to be disabled for this purpose.

 

Contributions in a total amount up to the annual gift tax exclusion amount, currently $14,000, can be made to an ABLE account on an annual basis, and distributions are tax-free if used to pay qualified disability expenses.

 

These are expenses that relate to the designated beneficiary’s blindness or disability and help that person maintain or improve health, independence and quality of life. For example, they can include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services and other expenses.

 

In general, an ABLE account is not to be counted in determining the designated beneficiary’s eligibility for many federal means-tested programs, or in determining the amount of any benefit or assistance provided under those programs, although special rules and limits apply for Supplemental Security Income (SSI) purposes.

 

The proposed regulations, available today for public inspection at www.federalregister.gov, provide guidance to state programs, designated beneficiaries and other interested parties on a number of issues. For example, the proposed regulations explain the flexibility the programs have in ensuring an individual’s eligibility for an ABLE account. They also indicate that the IRS will develop two new forms that ABLE account programs will use to report relevant account information annually to designated beneficiaries and the IRS — Form 1099-QA for distributions and Form 5498-QA for contributions.

Until the issuance of final regulations, taxpayers and qualified ABLE programs may rely on these proposed regulations.

 

The IRS welcomes comments. Comments must be received by Sept. 21, 2015, and may be submitted electronically, by mail, or hand delivered to the IRS. A public hearing is scheduled for Oct. 14, 2015, at the IRS Auditorium, 1111 Constitution Ave. NW, in Washington. See the proposed regulations for details on submitting comments or participating in the public hearing. More information can be found at Tax Benefit for Disability: IRC Section 529A.

 

 

Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.

 

15427 Vivian - Taylor, Michigan 48180 – voice (734) 946-7576  fax (734) 946-8166

website: www.rigotticpa.com    email: rigotticpa@gmail.com  Tax ID # 38-3083077

 


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